High Yield a More Attractive Option in Emerging Markets?

2019 has thus far seen the reemergence of emerging markets, but while investors are sifting through the plethora of opportunities the EM space has to offer, it’s wise to not overlook the high yield corner of the bond markets.

Domestically, seeking opportunities within high yield might seem like an arcane idea given the serendipitous bull run came to a crashing halt in the volatility-laden fourth quarter of 2018. The risk-on sentiment that fueled three-fourths of 2018 may have gone asunder as the massive sell-offs took place to end 2018.

However, opportunities abroad in the high yield is an option that could prove more attractive that investment-grade debt.

“Investors that include emerging markets corporate bonds within their fixed income portfolio may gain exposure to favorable long-term growth trends in emerging markets,” wrote Fran Rodilosso, Head of Fixed Income ETF Portfolio Management at Van Eck. “They may also potentially earn attractive yields and add diversification to a corporate bond portfolio. From a portfolio construction perspective, we believe that focusing on the high yield segment of this market may be a better option compared to a broad exposure that includes both investment grade and high yield securities.”

Growing with the Inflows

To start 2019, investors may have been hesitant by the red prices in emerging markets. However, the U.S.-China trade negotiations could be paving the way for a more positive outlook, which has been reflected in the number of inflows into the EM space.

With respect to value compared to price, many of these ETFs from abroad presented a profitable opportunity that can be realized, especially if China and the U.S. eventually ameliorate their trade differences. It presented an opportunity for the investor who is seeking value in terms of locating discounted assets.

Investors have piled $86 billion thus far into EM stocks and bonds, according to data from the Institute of International Finance. The data also reflects investor behavior with regard to broad-market EM exposure within the ETF space.

Emerging markets combined have netted $12.8 billion when looking at the top ten year-to-date inflows with the iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG) leading the pack–$4.8 billion in YTD inflows.