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.
“When compared with the late 1990s, sovereign balance sheets have become less vulnerable to a stronger U.S. dollar,” Sergio Trigo Paz, head of emerging markets fixed income at BlackRock, said in a note. “High yield emerging-market corporate bonds could be a good source of income for global investors.”
Additionally, BlackRock argues that emerging market corporate debt is attractive relative to the near-zero yields on developed European debt. According to JPMorgan, EM bonds yield about 3.5 percentage points more than U.S. Treasuries.
While some, like the Bank For international Settlements, warned that USD-denominated emerging market debt may be vulnerable to a strong dollar, Goldman Sachs Asset Management argues that the concerns are exaggerated. Companies that borrowed foreign debt typically also hedge currency exposure or have a steady dollar revenue stream to payoff the interest.
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.