Canadian institutional investors are optimistic about the prospects of emerging markets bonds, with more than half (52 per cent) saying they’re likely to increase their exposure over the next two years, according to a new survey by Vontobel Asset Management Inc.

The survey, which polled more than 200 global institutional investors across Asia-Pacific, Europe and North America, found 56 per cent of Canadian respondents cited the opportunity for asset appreciation as the most salient reason for increasing allocations to emerging markets fixed income, followed by income stream (44 per cent) and liquidity (44 per cent). 

In addition, Canadian investors cited inflation (54 per cent) and monetary policy (50 per cent) as the key macroeconomic issues they expect to impact their fixed income portfolios. And, despite volatile macroeconomic conditions, nearly 58 per cent were bullish on fixed income overall since rising interest rates have made the asset class more attractive. 

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When considering their allocation to emerging markets fixed income over the next two years, 77 per cent of Canadian institutional investors said they favour broadly diversified active strategies, up significantly from the 40 per cent that said the same in 2022. More than half (58 per cent) of respondents said environmental, social and governance strategies are also a priority.

The survey found Canadian investors plan to increase their allocations to all segments of emerging markets fixed income over the next two years, including emerging markets corporate bonds (76 per cent) and emerging markets sovereign debt in hard currency (56 per cent). 

In addition, it found holdings in blend strategies are beginning to grow, with around eight per cent of Canadian respondents saying they access emerging markets that way, compared to none last year. More than three-quarters (76 per cent) said they plan to increase their allocation to these portfolios over the next two years.

Read: 2022 GIC coverage: Institutional investors seeking better risk-adjusted returns should turn to emerging market debt

Despite the increased interest in emerging markets fixed income overall, current allocation to emerging markets sovereign debt in local currency has greatly declined among Canadian investors, falling to 19 per cent in 2023 compared to 47 per cent in 2022. However, 38 per cent said they still plan to increase their exposure to emerging markets sovereign debt over the next two years, with respondents citing income stream (67 per cent) and ready availability of assets (67 per cent) as the primary drivers in their decision-making. 

“Investors need to position now or risk missing an attractive entry point,” said Simon Lue-Fong, head of the Vontobel Fixed Income Boutique, in a press release. “Managing allocations across the EM fixed income segments can be difficult and this is boosting the appeal of blend approaches, which can offer advantages in terms of positioning and ease of access to valuable opportunities.” 

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