Emerging market bonds and related exchange traded funds have weakened ever since Donald Trump won the elections and promised to enact protectionist policies, but recent selling could provide a good entry point for long-term investors.
The recent sell-off led to value in emerging market debt, William Sokol, Product Manager of ETFs at VanEck, told ETF Trends in a call. While emerging bonds may continue to experience short-term volatility in response to President-elect Donald Trump’s policies, there is no real change in fundamentals.
“For the long-term, our view is that any declines provide good opportunity to add exposure,” Sokol said.
Due to the tremendous diversity within the emerging market bonds, structural reforms many countries have implemented and improved fundamental outlook, there is a strong case for strategic long-term allocation to emerging market debt within a diversified investment portfolio, Sokol said in a research note.
Nevertheless, Sokol warned that investors should expect short-term volatility in the coming months until President-elect Trump clarifies some of his positions and is ability to implement policy changes. Consequently, these rockier periods could lead to attractive entry points for investors.
For now, the “Trump trade” has exhibited higher interest rates across the yield curve and an appreciating U.S. dollar due to rising growth and inflation expectations.
“If this continues, credit sensitive asset classes such as high yield emerging markets corporate bonds may benefit,” Sokol said.
A U.S. dollar-denominated investment grade sovereign emerging market bond strategy may also help investors focus on higher quality assets and avoid the volatility associated with emerging market local currencies while gaining exposure to high credit quality.
“Although these bonds may exhibit sensitivity to changes in interest rates, they could also benefit if rates retreat from their recent highs. This could occur if it appears that Trump may not be able to deliver on the growth-oriented agenda he has promised, resulting in lower inflation expectations,” Sokol said.
On the other hand, if Trump does not deliver on his promises in a timely fashion, the recent pullback in emerging currencies could reverse and help support local currency-denominated emerging debt.
Income-oriented investors have a number of ways to gain exposure to the emerging bond market, such as the broad VanEck Vectors Emerging Markets Aggregate Bond ETF (NYSEArca: EMAG), which includes a combination of U.S. dollar-, euro- and local currency-denominated bonds. EMAG also comes with an attractive 4.40% 30-day SEC yield.
The VanEck Vectors J.P. Morgan EM Local Currency Bond ETF (NYSEArca: EMLC), which tracks emerging market bonds denominated in the local currencies or in the currency of the issuing country, has a 6.08% 30-day SEC yield.
Additionally, the VanEck Vectors Emerging Markets High Yield Bond ETF (NYSEArca: HYEM), which targets USD-denominated speculative-grade emerging-market bonds, has a 6.28% 30-day SEC yield.
For more information on the fixed-income market, visit our bond ETFs category.