EMD: Reframing the External vs. Local Debt Debate for 2021

The historical outperformance of external debt has led emerging markets debt (EMD) investors to overweight external debt compared with local debt.

Asset manager data demonstrate investors’ preference for EM external debt over EM local debt. According to eVestment, as of 31 December 2020, the universe of local currency managers had $121 billion in assets under management (AUM). The equivalent for external debt (excluding corporates) was $332 billion. The same picture is evident in many blended managers’ allocations, where biases toward external debt are common in the choice of strategic benchmarks and tactical allocations.

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