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
“EM economies have not only survived several severe bouts of financial tightening in the last few years (Taper Tantrum, Dollar surge, commodity price collapse and the start of the Fed hiking cycle), but they have done so with low default rates and improving NIIPs. EM assets today pay high yields and EM currencies are cheap following the giant portfolio shift induced by QE over the last few years. Although the turnaround in favor of EM fixed income has already begun, there is still time to get out of the developed market crash zone,” according to an Ashmore note posted by Dimitra DeFotis of Barron’s.
Iinvestors who typically associated the developing economies with greater risk should note that these emerging bond ETFs include heavy allocations toward investment-grade debt securities. For example, EMB holds investment-grade AA 2.1%, A 12.7% and BBB 42.3%, along with speculative-grade BB 19.2%, B 15.6%, CCC 5.1% and D 3.0%. PCY has AA 6%, A 10%, BBB 37%, BB 24%, B 17% and CCC 3%. VWOB includes Aa 5.9%, A 16.0%, Baa 41.9% and speculative-grade Baa or lower 36.2%.
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iShares J.P. Morgan USD Emerging Markets Bond ETF