Still a case for emerging market debt

By on April 26, 2022 0

With US interest rates rising and domestic bond funds falling, it’s easy for investors to assume that all fixed income strategies should be ignored this year.

Believe it or not, there remains a case for emerging market debt. Enter the VanEck JP Morgan EM Local Currency Bond ETF (NYSEArca: EMLC). Globally, emerging market bonds are performing generally in line with US Treasuries, but there are pockets of outperformance, particularly in Latin America.

“Emerging market debt also suffered, even before the stress test of higher Deutsche Mark policy rates. The good news: Many emerging market central banks raised rates early in an attempt to contain inflation. This approach has created attractive yield and currency valuations, in our view. Broad indices hide a lot of differentiation, so analyzing underlying exposures is key,” according to BlackRock research.

The $3.3 billion EMLC tracks the JP Morgan GBI-EM Global Core Index and holds 355 bonds, and although the listed index fund holds local currency denominated bonds and the dollar is soaring, there are still opportunities among emerging market debt.

“The local currency debt of commodity producers such as Latin America, the Middle East and Africa has actually seen gains this year, outpacing the debt of commodity consuming countries in Asia and Europe. The latter was directly affected by the fallout from the Russian invasion of Ukraine,” adds BlackRock.

Concerning Africa and Latin America exposure, Brazil and South Africa combine 17% of EMLC’s geographical exposure. Mexico, Colombia, Peru and Uruguay combine for almost 20%.

Adding to the argument for EMLC, many emerging market central banks, unlike the Federal Reserve, raised rates last year to dampen inflation, meaning inflation is down in some economies. developing, and some of these central banks are unlikely to be as aggressive as the Fed on the 2022 tightening.

“We also see a strong starting position for emerging market debt, given depreciating emerging market currencies, improving external balances, declining foreign ownership and attractive coupon income. main reason: many emerging market central banks have been ahead of the curve in raising interest rates to fight inflation,” BlackRock notes.

Plus, EMLC delivers when it comes to revenue. The VanEck fund posted a 30-day SEC yield of 6.53%, suggesting that it more than adequately compensates for some of the risks associated with emerging market bonds.

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Opinions and predictions expressed herein are solely those of Tom Lydon and may not materialize. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.