Though steadier than their equity-based counterparts, the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) and PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY) are among the exchange traded funds that have been clipped by the emerging markets downdraft this year.
With the U.S. dollar rising against a slew of emerging markets currencies, some bond observers have issued a warning on emerging market bonds denominated in USD, arguing that the stronger dollar would make it harder for emerging market borrowers to service debts.
While many emerging markets have garnered a bad reputation for experiencing spiraling debt defaults in face of rapid currency depreciation, the developing economies are more resilient in a weak commodities environment.
According to BlackRock, emerging market governments have accumulated less dollar debt, built up foreign reserves and adopted flexible exchange rates to obviate mistakes during the 1980s and 1990s crises. Though the current outlook for emerging markets debt is far from sanguine, some analysts see opportunity in the asset class. [Investors Turn to Emerging Market Bond ETFs for Higher Yields]
“Emerging market funds have taken a defensive stance throughout 2015 being overweight EM investment-grade almost exclusively. This stance has penalized their excess returns as most of the index total return has come from high-yield credits: Russia, Ukraine and Argentina. Our analysis, combined with the anecdotal evidence of EM funds’ high cash balances, suggests that technical factors for EM credit remain strong. Indeed, if the market finds a technical catalyst for a relief rally, the positive correction may be amplified by the defensive stance of EM funds,” according to an excerpt of a Citigroup note posted by Dimitra DeFotis of Barron’s.