Scores of international asset classes are seen as potentially vulnerable to the outcome of next week’s U.S. presidential election.
Some investors believe the same rings true for emerging markets bonds and the corresponding exchange traded funds, which have been among this year’s best-performing fixed income funds.
That after a year in which dollar-denominated funds such as the iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEArca: EMB) to local currency fare such as the Market Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC) were decked by outflows and downturns amid fears the Federal Reserve would raise interest rates multiple times in 2016.
According to BlackRock data, emerging market bond ETFs attracted some $5.8 billion in net inflows over the third quarter, the largest money influx of any quarter on record, reports Thomas Hale for the Financial Times.
The record inflows follow the previous quarterly record in the second quarter of this year. Year-to-date, emerging market bond ETFs have seen $12.7 billion in inflows, which already outpace the previous annual record of $8.3 billion in 2012.
Still, concerns linger about how the U.S. presidential race can affect emerging markets debt.
“Firstly, we consider a Hillary Clinton White House and a Republican or split Congress. This equals ‘status quo/gridlock’ but could still trigger some risk-on sentiment and relief at the end of the uncertainty, with some outperformance of Mexico local rates. The appetite for EM high-yielders would remain strong not least because of renewed prospects of monetary easing within EM. The other three scenarios imply rather more uncertain results: a clean-sweep by the Democrats (‘bigger government’), a Trump White House but divided Congress (‘mainstream conservative’) and a Republican clean sweep (‘populist overhaul’),” according to an HSBC noted posted by Dimitra DeFotis of Barron’s.[related_stories]
Fundamentals in the emerging economies continue to strengthen with increased expected growth, stabilizing commodities market and narrowing deficits.
Consequently, investors may still find value and generate attractive yields through emerging market debt, even with the pending Federal Open Market Committee meeting and increased likelihood of a rate hike sometime this year.
SEE MORE: A Solid Emerging Market Bond ETF Pick
Debt-to-GDP ratios in developing economies are far below those seen in the U.S. and the Eurozone.
For more information on the fixed-income market, visit our bond ETFs category.
iShares J.P. Morgan USD Emerging Markets Bond ETF
Tom Lydon’s clients own shares of EMB.
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