Investors seek to earning a little extra yield and diversify a portfolio should consider emerging market debt and bond-related exchange traded funds, especially as this fixed-income segment has been relatively overshadowed by developed market debt.
A number of stars are aligning to help shine a light on emerging market debt, with low interest rates in the U.S., rising commodity prices and ongoing expectations of improving growth in developing economies.
Previous causes for concern have subsided. Notably, the Federal Reserve rate hike expectations have diminished after the Brexit vote as market observers argued that central bank policy makers would be loath to make changes in an uncertain post-Brexit world. Oil prices have recovered off their 12-year lows to around $50 per barrel, supporting many oil-heavy emerging economies. Additionally, China, the second largest economy in the world, appears to be stabilizing.
“EM debt has long offered attractive income, but weak fundamentals made it a somewhat risky proposition,” BlackRock analysts, led by Richard Turnill, Global Chief of Investment Strategist, said in a research note. “We now see the asset class poised to benefit from the ongoing investor search for yield as three key headwinds to EMs have turned into tailwinds.”
Related: Encouraging Signs for Emerging Markets ETFs
Emerging market debt also offers much more attractive yields after global investors piled into developed market debt in response to loose central bank policies, pushing yields toward record lows.
“Emerging market debt came into the year undervalued and some say there is more room to go,” William Sokol, Product Manager of ETFs at VanEck, told ETF Trends in a call.
[related_stories]For instance, Sokol said that emerging market debt spreads over U.S. government debt remain attractive and still hover above historical averages.
EM debt also trade at attractive valuations relative to U.S. corporate debt, providing an average 60 basis points more for the same volatility, Sokol added.