This Region Could be Problematic for EM Bond ETFs

Already one of this year’s most embattled asset classes, emerging markets debt, could face more pain. At least that could be the case for bonds from region’s issuers as the Asian Development Bank sees lingering risks for debt issued by Emerging East Asia issuers.

While the ADB noted in its Asia Bond Monitor report released Thursday that countries in the region are in a better position today than during the Asian financial crisis of the late 1990s, emerging Asian economies remain vulnerable to the loss of U.S. stimulus. Mere speculation and talk of tapering of the Federal Reserve’s quantitative easing program is one reason the WisdomTree Asia-Pacific Local Debt ETF (NYSEArca: ALD) and the Market Vectors EM Local Currency Bond ETF (NYSEArca: EMLC) are down 5.6% and 7.9%, respectively, this year. [Taper Talk Pummels Local Currency ETFs]

“Growth in the region had been fueled by the easy availability of credit, which will now become more restricted,” the ADB said in the report. “Rising levels of corporate indebtedness also suggest that the impact of higher interest rates on the economy may be intensifying.”

ADB classifies the following countries as Emerging East Asia: China, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Thailand and Vietnam. Hong Kong and Singapore are AAA-rated developed markets and South Korea is viewed as a developed market by some index providers, but ADB still highlighted several risks that could affect the region’s local currency bonds.