Alongside gold and developed market Sovereign bonds, developed market equities and bonds have been some of the hottest trades this year.

According to Bank of America’s “Flow Show” report published at the end of last week, around $2 billion flowed into emerging market debt funds over the last week. This marks the seventh straight week of inflows into such funds. Over this period, more than $20 billion has been invested in emerging market bond funds, the largest amount on record.

Jeffrey Gundlach’s Doubleline Capital – Emerging Market Debt And The Three C’s

Meanwhile and $5 billion found its way into emerging market stock funds last week, taking the seven-week total to $14.6 billion for emerging market equity funds, a near two-year high.

Emerging market debt up 24% in 2015

Emerging market debt funds have become a hot commodity this year as the yields on developed market bonds plunge to levels that offer little in the way of return. Bond funds have attracted $138 billion so far this year. On the other hand, equity funds have seen outflows of $128 billion since the start of 2016 (all of these outflows come from mutual funds, low-cost equity ETF have attracted $52.5 billion of assets so far this year).

It seems that emerging markets are only too happy to generate more debt to meet the increasing demand for investors.

The $5 Trillion Emerging Market Debt Issue

According to research from Bank of America’s quantitative fixed income strategist Jane Brauer, last year the total value of global emerging market outstanding debt rose to $18.2 trillion, up around $2 trillion year-on-year. In local currency terms this gain is 24% but in US dollar terms, thanks to dollar depreciation, the rise in debt looks much more subdued at only 12%. For 2014 the total value of global emerging market outstanding debt grew by 12% year-on-year and on average the emerging market debt stock has increased by approximately 14% per annum since the year 2000.

Unsurprisingly, China was responsible for almost all of the growth in debt last year. China total debt rose by $2 trillion during 2015. China domestic debt skyrocketed by 30% in 2015 in US dollar terms, with the government and financial institutions local debt components both increasing 36%.

The size of China’s presence in the emerging market debt market shouldn’t be underestimated. After last year’s growth China now accounts for 50% of all global emerging market domestic debt and 12% of all global emerging market external debt.

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Taking on debt

China isn’t the only emerging market with a rapidly expanding debt pile.

Last year among the larger countries domestic debt in local terms grew the most in Russia and Indonesia by 28% and 22%, respectively, but was offset by 25% and 10% depreciation when expressed in US dollar terms. Growth of less than 2% in local terms took place in Malaysia, Israel, Indonesia, and Taiwan.

Russell Napier: The Danger In Emerging Market Debt

Still, the emerging market credit market only accounts for a relatively small chunk of the global debt market. According to data from the Bank for International Settlements, global emerging market domestic debt outstanding is 17% of world domestic debt, and global emerging market external debt is 14% of world external debt.

So, emerging market debt currently accounts for less than a fifth of the world total debt pile.

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