The JP Morgan GBI-EM Global Diversified Index generating a total return of 16.8% in US dollar terms, significantly ahead of the 1.3% delivered by developed government bonds in the same time period.
The asset class has now delivered investors double digit positive returns in seven out of the last 10 calendar years - with the largest decline being just -5.2% in 2008 - as an increasing number of investors recognise the superior economic fundamentals and fiscal position of emerging markets relative to the developed world.
According to JP Morgan research, emerging market bond funds saw a record US$94bn of inflows last year. We believe the shift away from developed government bond markets - which are characterised by very low yields and deteriorating credit quality - and towards emerging markets, where returns have historically been higher and credit quality is steadily improving, is a long-term structural phenomenon.
Looking ahead, we expect emerging market local currency debt to continue to attract and reward investors over the course of 2013. The asset class also offers what we regard as an attractive level of income in today's low global yield environment, with the JP Morgan GBI-EM Global Diversified Index yielding 5.5% as at the end of last year, compared to just 1.6% from US Treasuries.
An improving macroeconomic backdrop further supports our view that emerging local currency debt will perform strongly in 2013. China remains an important driver of investor sentiment towards emerging market assets and a major positive development has been the news on recovering activity in China. The most recent data shows that the economy grew by an annualised 7.9% in the fourth quarter of 2012, breaking a run of seven consecutive quarters of declining activity.
We are also encouraged that a number of external risks which have been plaguing markets - most notably the Eurozone debt crisis and the US fiscal cliff - are gradually being addressed. In our view, this should further support investor appetite for riskier asset classes over the coming months.
In this improving environment, we expect more economically-sensitive markets in Latin America and Eastern Europe to outperform domestically-focused Asian markets and we have positioned the Baring Emerging Markets Debt Local Currency Fund accordingly. Looking ahead, we expect currency appreciation to make a significant contribution to overall returns from the asset class as we believe several emerging currencies benefit from historically attractive valuations and strong economic fundamentals.
