This paper finds that a global component is materially strong in explaining local debt returns for a set of 12 Emerging Markets (EM) during a period rich in both idiosyncratic and systemic shocks (2005-2021). The first principal component (PC) explains 56% of return variance for the full sample and about 80% in some years. Similarly, when breaking down individual country returns based on global and idiosyncratic components, the fraction of the total variation explained by the global variable averages 0.86 across the 12 countries. A direct implication is that there is limited room for EM active investors (‘country pickers’) to outperform based solely on country fundamental analysis. Furthermore, the first PC is strongly related to global financial variables. That is, diversification benefits for passive cross-over investors to allocate in the EM local debt asset class are rather limited. This paper is an extension of Longstaff, Francis A., et al. "How sovereign is sovereign credit risk?." American Economic Journal: Macroeconomics (2011).

Keywords: Emerging Markets, local debt, global, idiosynratic, country specific, portfolio management.

Fil: Rosselli, Armando. Universidad de San Andrés. Departamento de Economía; Argentina.