In the current negative-yield environment fostered by central banks of developed markets, investors have little to lose from putting money in emerging market bonds. In fact, according to a commentary from Excel Funds, they may actually have more to gain.
It’s a story that bears little repeating: shock from the Brexit has left Europe and the UK in a state of lingering uncertainty. Central banks have also been pushing down interest rates, inspiring a generally bearish sentiment in most traditional bonds.
“The main advantage of emerging market debt is that it is a yield enhancement strategy,” remarks Sergei Strigo, Head of Emerging Market Debt & Currency at Amundi Asset Management, who also serves as sub-adviser lead of the Excel High Income Fund.
“[M]ajor central banks are cutting interest rates to a negative zone, and in the U.S. the Federal Reserve is not hiking rates to the same extent that investors thought they would, so fixed-income investors are left with very little yield that they can get on their traditional asset classes, hence they are forced to go into more alternative asset classes such as emerging market debt.”
The exodus into emerging markets is clear. Citing statistics from the Institute for International Finance (IIF), the commentary says that US$550 billion of foreign investments are forecast to flow into emerging markets this year alone, with bonds accounting for the majority of funds.
The report also says that emerging markets have been performing well, with U.S. dollar-denominated, emerging market bonds returning more than 12 percent so far this year. Taking past years up to 2011 into account, a yield pickup of around 6% or greater is expected.
“Given the strong track record of emerging market bonds over the past 4-5 years, we believe the asset class is a viable option for yield-seeking investors, who can reallocate funds from global bonds which currently offer minimal yields,” the piece says.
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