The emerging markets have rallied sharply after the the broad market pullback, and fixed-income investors should consider opportunities in developing market debt and related exchange traded funds.
“Emerging market debt (EMD) has rallied sharply this year, bouncing back from a tough 2018. Is now a good time to add exposure? We would be buyers on any material sell-offs, as we see fundamentals remaining supportive in coming quarters. Our overall view on emerging markets (EMs) favors equities over debt, yet we believe EMD offers attractive income for bond portfolios,” BlackRock strategists, led by Richard Turnill, said in a note.
The rally in emerging market debt has pulled down yields significantly as bond prices increased, with the yield spreads between emerging market debt and U.S. investment-grade bonds tightening as a result. Nevertheless, the BlackRock strategists argued that emerging market debt yields remain attractive on an absolute and relative basis over the long-term.
Emerging market bonds still look attractive because the asset class took a double whammy last year after the Federal Reserve raised interest rates and the U.S. dollar appreciated against its global peers. The outlook for the asset class this year now looks very different, with the Federal Reserve hinting at easing up its interest rate hikes and the U.S. dollar now showing a weaker outlook.
Looking ahead, the BlackRock strategists argued that there are three factors that could support the emerging market bond outlook, including a more supportive policy backdrop, large demand meeting tightening supply and subsiding geopolitical risks.