By now, most investors know emerging markets stocks and exchange traded funds have been turning in another batch of dismal performances this year. Investors also know that emerging markets fixed income funds are supposed to be vulnerable to changes in U.S. interest rate policy.
However, those changes have yet to materialize and ETFs such as the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) and PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEArca: PCY) have been far superior to their equity-based counterparts 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]
“Bigger debtors should keep paying their bills through the current slowdown, despite jarring downgrades to junk this year for once-prized issuers like Russia and Brazil,” reports Craig Mellow for Barron’s.