Investors jumping back into the murky waters of emerging markets (EM) is a positive sign for the capital markets as it portends to the risk dial being turned a few notches higher. EM assets like bonds were viewed with distaste amid the height of the pandemic, but investors are slowly warming up to EM bonds again.
One area that’s showing potential opportunities is in South African bonds. As the debt was caught in heavy sell-offs, like most EM assets amid the pandemic, investors are now morphing into buyers.
“In the face of near-zero returns in government debts across the globe, foreign investors were hurrying on to South Africa’s sovereign debts which had recently been downgraded in to junk territory, while the high-yielding debts in Africa’s most industrialized nation appeared to be grabbing investors’ attention amid a rise in appetite for riskier assets,” a Financial World article noted.
“More interestingly, the foreign investors, who had been the net sellers of South Africa’s sovereign bonds this year, became the net buyers over the past two weeks and had purchased 4 billion South African rand worth of bonds,” the article added.
Value investors looking at EM hope this could provide further confirmation that space is finally seeing brighter days following the pandemic. What will be interesting to watch is whether EM countries like South Africa can respond to the upside in a post-COVID world.
There are signs that the tide could be turning. Global investment firm Goldman Sachs “had forecasted a pessimistic outlook on S. African credit on prior occasions given the scale of the higher unemployment rate and Government mismanagement the world’s southernmost tip had been witnessing, said later this week that it would stick to a ‘buy’ rating on South Africa’s 10-year Government debts.
ETF Opportunities in EM
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.
Another option is the VanEck Vectors EM High Yield Bond ETF (NYSEArca: HYEM), which seeks to replicate the ICE BofAML Diversified High Yield US Emerging Markets Corporate Plus Index, which is comprised of U.S. dollar-denominated bonds issued by non-sovereign emerging market issuers that have a below investment grade rating and that are issued in the major domestic and Eurobond markets.
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