Recent protests in Chile are part of a larger wave of social unrest and political angst in emerging markets, with political stability in Peru and Ecuador also being called into question. Argentina appears to be heading toward a bond restructuring, and elections there over the weekend look set to mark a return to a more populist government. The political problems appear to share a common theme of resentment over sub-par growth and rising inequality.

But while investors need to monitor developments, we continue to see opportunities for investors in emerging market assets in nations that strive for reforms to address economic and social pressures.

* US-dollar-denominated emerging market sovereign bonds overall remain attractive, with yield of 5.2% on the benchmark EMBIG Diversified index. This remains a strong source of carry at a time when central banks in developed nations are back in easing mode. The asset class also has a track record of delivering solid risk-adjusted returns over the medium term.

* The EMBIG Diversified index is true to its label of being diversified, with 73 issuing nations. The countries currently facing sociopolitical challenges account for a relatively small share of the emerging market bond index, at 2.6% for Chile, 2.6% for Peru, 2.2% for Ecuador, and 1.3% for Argentina. While Argentine hard-currency bonds trade in distressed territory, Chile and Peru have investment grade ratings, indicating sizable buffers and little reason for investors to worry about potential credit events. Despite the political tensions the latter two countries are experiencing, their macro backdrops remain relatively benign thanks to a history of prudent fiscal policies, current account deficits funded largely by foreign direct inflows, and large foreign exchange reserves.

* Within emerging markets we also see opportunities in nations that are tackling reforms to improve the economic and investment outlook. Brazil, for example, is working on measures to improve fiscal sustainability and business conditions, and we expect at least some of these reforms to come to fruition, which should improve the outlook for economic growth and Brazilian corporate credit. Reform stories in a range of African nations such as Egypt, Kenya, and Ivory Coast also offer opportunities for investors, in our view.

So we continue to recommend an overweight to emerging market US-dollar-denominated sovereign bonds in our global tactical asset allocation.