The EM framing fallacy: Emerging market debt and the trials of a misunderstood asset class

How we frame things deeply affects how we process information and subsequently act on it. So much so that, despite convincing evidence to the contrary, it can be extremely hard to shake off a fabled preconception. It seems that once a label sticks it can be very hard to dislodge.

Emerging markets are case in point. At worst, the label conjures up a misleading picture. At best, it fails to fully capture the nuances that lie behind each constituent country and issuer. Our behavioural quirks have conspired to lead many investors to structurally underweight emerging markets, particularly when it comes to allocating to debt.

Given the positive macroeconomic backdrop, strong technical tailwind and the increasing skew towards investment grade, investors would do well to rid themselves of their long-held, and deep-rooted assumptions. Those who manage to reframe their thinking may find themselves both enlightened and surprised by the true nature of this misunderstood asset class.

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