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Emerging market debt could be one of the best investment opportunities for the coming year. Emerging markets offer strong sovereign fundamentals combined with strong growth prospects driven by a number of different factors. While much of this potential has been realized in the equity markets, investors haven’t quite priced the growth into the debt markets.

Emerging Market Debt Catalysts

Emerging markets are expected to see strong growth over the coming years. The primary drivers behind this growth are young populations with few children on the way, which has created what some economists refer to as a “demographic dividend.” Ultimately, these trends are expected to lead to strong productivity gains and domestic spending.

Emerging market equities have enjoyed an extended surge over the past few years, but emerging market bonds are only beginning to enjoy some of the upside. These bonds are under-owned by international investors and represent the future of global investing, according to JP Morgan’s global strategist Tom Elliott in a recent Bloomberg interview.

Investing in Emerging Market Debt

Emerging market debt comes in two flavors:

  • Dollar Denominated (DD) – These are largely Latin American bonds that are backed by very solid economies posting significant growth rates.
  • Local Currency (LC) – These are largely Asian bonds that also have solid economies, but perhaps slightly more risk, especially given China’s situation.

Some popular emerging market ETFs, include:

  • PowerShares Emerging Markets Sovereign Debt (NYSEARCA:PCY) (DD)
  • iShares JP Morgan USD Emerging Markets Bond (NYSEARCA:EMB) (DD)
  • WisdomTree Emerging Markets Local Debt (NYSEARCA:ELD) (LC)
  • Market Vectors Emerging Market Local Currency Bond (NYSEARCA:EMLC) (LC)
  • iShares Emerging Markets Local Currency Bond (NYSEARCA:LEMB) (LC)

Each of these options has various advantages and disadvantages, but they are all great options for investing in emerging market debt. Investors may want to consider purchasing a combination of dollar denominated and local currency ETFs in order to diversify their exposure to the various regions around the world and hedge against any isolated risks.

Disclosure: I am long ELD.

Source: Emerging Market Debt: The Best Investment For 2012