When institutional investors refer to Emerging Market Debt, they generally are speaking of debt from the 24 or 32 next largest economies after the OECD 10. It includes countries like Brazil and Mexico, Thailand, Korea and the Philippines, the Czech Republic, Turkey and Poland.
Because of inflation, inefficiencies in government policy and in the banking sector, prevailing interest rates are often much higher in the economies than in the more developed markets. These higher interest rates also compensate for the risk of devaluation.
Usually the currencies of these countries move in sync with one of the major currencies like the US Dollar and the Japanese Yen. But recently, the economic performance of these countries has been good enough that their currencies have been appreciating in value.
Because of the higher interest rates and the risk of further US Dollar devaluation, some people are advocating buying Emerging Market Debt. I normally would say that this type of investment is not suitable at all for a retail investor. There are HUGE risks associated with this type of strategy.
But, I feel strongly that the US Dollar is in for a period of sustained devaluation. Also, the industry has developed a number of emerging market mutual funds. As such, if you have a tolerance for high risk and want to take a speculators chance, you may wish to find some of these funds for your portfolio.
Now go out there and make some money!
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