2. EM vs. DM fundamentals.
Compared to developed markets (or DM), emerging markets are experiencing faster growth and by many measures –particularly fiscal – greater macroeconomic stability. In fact, the big story in emerging market debt is an improvement in credit quality – both in an absolute sense and relative to developed market issues. Over the past two decades, many emerging market countries have made significant improvements to their fiscal positions and can now boast more pristine balance sheets than most developed markets.
Market Realist – Emerging market bonds are not as risky when comparing budget deficits
The graph above shows the government budget deficit or surplus as a percentage of the gross domestic product (or GDP). Some major developed economies (EFA) have a high budget deficit. Japan (EWJ), for example, has a budget deficit of 7.6%. Germany (EWG) is the only major developed economy with a budget surplus, which is only 0.1%.
On the other hand, most major emerging markets (EEM) have controlled their budget deficit. India (EPI), though, has had a high budget deficit perennially and is an exception. India’s budget deficit is 4.1%. Brazil (EWZ) has a budget surplus of nearly 1%.
Also, most emerging markets have less debt compared to their developed market counterparts. This means emerging market bonds aren’t as risky as you may think!