Ii why market structure rewards active management in local currency emd

Why market structure rewards active management in local currency EMD

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Why market structure rewards active management in local currency EMD

Key takeaways • A large, diverse and fast-growing opportunity set: local currency EMD spans economies at very different points in the cycle, offering income, growth and genuine diversification. • Structure, not just yield, rewards active management: wide Edward Harrold dispersion, independent return drivers and index mechanics Fixed Income Investment Director create levers a passive approach cannot pull. • Avoiding the wrong risks matters as much as picking the right bonds: separable rate and currency risk make disciplined risk control central to long-term returns.

Local currency emerging market debt (EMD) has matured into one of the most diverse opportunity sets in global fixed income. Issuance has grown, liquidity has Jeremy Cunningham deepened, yield curves have developed, and the ownership base has Fixed Income broadened across domestic and international investors. For many emerging Investment Director economies, a functioning local bond market and credible monetary policy are now signals of economic development rather than aspirations.

For many investors, the question is no longer whether local currency EMD merits an allocation, but how best to capture it. A passive or smart beta approach offers a low-cost entry point, but it also embeds a series of decisions that many investors may not fully appreciate. In our view, the structural characteristics of this asset class, namely its breadth, heterogeneity and multiple sources of return, create conditions in which specialist active management is particularly well placed to add value. The scale of the market underlines how much is at stake. The widely followed JPMorgan GBI-EM Global Diversified Index represents around US$2.8 trillion, compared with approximately US$16.6 trillion of tradable local currency government debt. In other words, the benchmark captures less than 17% of the broader market. A substantial opportunity set therefore sits outside the standard benchmark from the outset. This paper sets out four structural features of the market that, taken together, make the case for an active approach.

Benchmarks only capture part of a much larger market Market value of key EM local currency benchmark

Total EM government tradable debt (LHS)

18,000 Market value (US$ billion)

16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, *

Past results are not a guarantee of future results. *Data as at 30 August 2026. Tradable debt is as defined by JPMorgan and includes tradable loans, local and regional government tradable debt, Treasury bills, central bank bills and other short-term debt. Source: JPMorgan.

1. Dispersion: local currency EMD is not one market The single most important feature of this asset class is that it is not homogeneous. Beneath the label of emerging market debt sits a collection of economies at very different stages of the cycle, facing very different pressures. Inflation trajectories differ, and growth paths, fiscal positions, external balances and political circumstances vary widely from one country to the next. A bond investor positioned in one market is often facing an entirely different opportunity from one positioned elsewhere. This dispersion is not a footnote; it is the foundation of the active case. The wider the differences between countries, the greater the potential for a manager who researches those countries deeply to distinguish between them and allocate accordingly. Nowhere is that divergence more visible than in monetary policy, where emerging market central banks are frequently moving in opposite directions at