Investors looking for a comeback story in 2024 might want to give emerging markets (EM) bonds a closer look. As the capital markets anticipate rate cuts in the new year, this could translate to strength for EM bond prices.
“Right now, if you ask Bank of America, they’ll tell you that EM bonds are the most appealing trade for 2024 in terms of risk-adjusted returns, ” Finimize noted. Finimize posited that global inflation will eventually return to normalcy. They also noted global central banks will implement rate cuts, which should result in a weaker U.S. dollar. EM assets are typically tied to the performance of the local currency against the dollar. So this should be a boon for EM assets like bonds.
“As this happens, Bank of America says, the US dollar is likely to weaken. That should make the repayments on EM bonds cheaper for those governments and companies,” Finimize added. “Think of it this way: if they borrow in US dollars, and the greenback falls by 25%, the cost to repay the loan has dropped by 25% (assuming they operate in their local currency).”
The article also noted that BofA is anticipating a 12% return in EM bonds with a low volatility of 5.6% even ahead of a new year, which is typically marked by uncertainty. Even if rate cuts don’t happen swiftly, EM bonds still present an attractive option. That’s because of their yield relative to other bonds, albeit more credit risk.
“This kind of yield advantage shouldn’t be underestimated: it’s one of the main reasons why emerging market bonds have outperformed emerging market stocks over the very long term, delivering annualized returns of almost 8% since 1992,” Finimize added.
BofA Recommends VWOB
Bank of America endorsed one ETF to bet on an EM bonds comeback. That’s the Vanguard Emerging Markets Government Bond ETF (VWOB). With a low 0.20 expense ratio, the fund is deeply diversified. It has almost 700 bond holdings and an average duration of just under seven years.
VWOB seeks to track the performance of a benchmark index that measures the investment return of U.S.-dollar-denominated bonds issued by governments and government-related issuers in emerging market countries. The fund employs an indexing investment approach designed to track the performance of the Bloomberg USD Emerging Markets Government RIC Capped Index. That provides easy access to EM government bonds.
All of the fund’s investments will be selected through the sampling process. Under normal circumstances, at least 80% of the fund’s assets will be invested in bonds included in the index. For yield seekers, the fund comes with a 30-day SEC yield of 7.26% as of December 4.
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