Chapter 13 Emerging Markets Debt

Maria Mednikov Loucks, CFA

Director, Emerging Markets Debt Portfolio Manager UBS Asset Management

John A. Penicook, Jr., CFA, CPA

Managing Director, Emerging Markets and High Yield Debt UBS Asset Management

Uwe Schillhorn, CFA*

Director, Emerging Markets Debt Portfolio Manager UBS Asset Management

Emerging markets debt (EMD) warrants consideration in diversified portfolios based upon its normal return potential, risk characteristics, and portfolio diversification benefits. Fundamental investment analysis of this market requires an understanding of sovereign credit risk and the compositional complexities of the emerging market bonds themselves. The normal return potential of the market, in conjunction with its low correlation to other bond and equity markets, offers the opportunity to improve a portfolio’s risk/reward profile.

In the broadest sense, the group of emerging countries includes all nations not considered industrialized or already “developed.” Since the latter group has only two dozen or so members, the emerging country universe encompasses most of the world’s population and geography. However, because most emerging countries have no investable debt securities, only a subset of these countries comprises the emerging markets debt universe. Hence, the more precise terminology is emerging market, rather than emerging country.

While convention and market terminology lump all of these countries into one market, there are profound, fundamental ...

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