As the Federal Reserve continues to pump liquidity into financial markets and interest rates stay low, investors are turning to emerging market fixed-income assets and exchange traded funds for quality, capital growth and, most importantly, yields.
Analysts at Ned Davis Research and TCW argue that emerging market sovereign debt has a lot of potential, writes Trang Ho for Investor Business Daily. [Six Emerging Market Bond ETFs with Attractive Yields]
For instance, Neil Leeson, ETF Strategist, points out that if global growth gains momentum, emerging market currencies will strengthen against the dollar, which would boost local currency-denominated emerging market bonds.
Moreover, loose monetary policies will devalue the U.S. dollar.
“Expansionary monetary policy in developed markets tends to boost commodity prices and hence has a positive spillover to emerging market trade balances,” TCW said in the article. “There are already incipient signs of stabilization in global manufacturing activity, which historically has triggered outperformance of emerging markets as an asset class, in particular local currency bonds.”
The emerging markets are also saddled with lower debt burdens and smaller deficits than many developed economies — large debt would hinder growth as indebted countries pay back loans or cut spending.
“EM local markets offer positive real interest rates reflecting market-driven supply and demand for funding,” TCW strategists said. “In contrast, financial repression through aggressive quantitative easing has resulted in negative real rates of return in the developed world.”