Emerging markets (EM) present an interesting dichotomy for investors these days—for one, they represent a value option given the recent downturn as a result of the coronavirus. On the other hand, they’re exposed to heavy risk amid the uncertainty and as such, investors are opting for EM assets like bonds in the strongest countries.
A risk-off sentiment saw outflows from EM equities during the month of March, but now investors are returning to snatch up EM bonds.
Per a Wall Street Journal report, EM assets “have sold $141 billion of sovereign bonds as of April 23, according to Dealogic data. That is up from $118 billion in the same period of 2019, and within a hair’s breadth of the record set in the prior year.”
“It shows that there is still some appetite for solid names,” said Abdelak Adjriou, portfolio manager at American Century Investments. “The selloff that happened: It was blind, it did not distinguish the good from the bad countries.”
In this low yield environment, certain EM bonds can offer investors more yield as opposed to traditional safe haven debt like U.S. Treasury notes. However, investors need to know where to look—Saudi Arabia, Qatar, and Panama are a few countries that are worth a look.
“They have had to offer higher yields to draw investors,” the report added. “Saudi Arabia paid an average 0.55 percentage point more in coupon payments than it had on its last sale of comparable size, according to an analysis by Oxford Economics. Abu Dhabi offered an extra 0.58 percentage point.”
“It’s been a win-win: The countries got what they wanted, they have bolstered their foreign-exchange liquidity buffers and they have paid a premium for that,” said Timothy Ash, senior sovereign strategist covering emerging markets at BlueBay Asset Management. “And investors have made a bit of money from the new deals.”
An Active EM-Focused ETF
Despite the coronavirus putting emerging markets in a downtrodden state, there is still value to be had in EM assets via ETFs like the Goldman Sachs ActiveBeta Emerging Markets Equity ETF (GEM). GEM seeks to provide investment results that closely correspond, before fees and expenses, to the performance of the Goldman Sachs ActiveBeta® Emerging Markets Equity Index.
The fund invests at least 80% of its assets (exclusive of collateral held from securities lending) in securities included in its underlying index, in depositary receipts representing securities included in its underlying index and in underlying stocks in respect of depositary receipts included in its underlying index. The index is designed to deliver exposure to equity securities of emerging market issuers.
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