Emerging markets bonds, both of the dollar-denominated and local currency varieties, often tempt fixed income investors with higher yields. However, that’s compensation for higher risk, which often manifests itself at the credit level or via geopolitical turbulence.
Geopolitical strife is always hard to predict. That being said, the fundamental outlook underpinning hard currency emerging markets debt and ETFs such as the Neuberger Berman Emerging Markets Debt Hard Currency ETF (NEMD) is stronger than it’s being given credit for. Indeed, NEMD, one of the new kids on the emerging markets fixed income ETF block, could be one of the standouts in this year’s expansive crop of infant ETFs.
In what may surprise some advisors and investors, NEMD could be a bond fund to consider here and now. Some experts see developing world debt as carrying less risk than developed market equivalents.
“The relative perception of sovereign risk has shifted in favour of EM, as DM countries face structural fiscal deficits and high debt/GDP ratios. EM sovereign debt has returned +8.7% year-to-date (YTD) to end August, and started seeing the first inflows after 3 consecutive years of outflows, since the onset of the Ukraine war,” noted Magda Branet of AXA Investment Managers.
NEMD: Young, But Relevant
With new ETFs, age is sometimes nothing but a number. That’s relevant wisdom regarding NEMD. Multiple tailwinds support the case for this fund, including the U.S. dollar’s precipitous decline. That decline that could be hastened by more interest rate cuts.
“A weak USD has become consensus- with shorts overstretched. We however think any USD retracements to be temporary, underpinning a longer-term case for EM local currency assets,” added Branet.
She adds that yields for emerging markets hard currency debt remain attractive relative to domestic corporate debt. Additionally, other yield opportunities throughout the emerging markets landscape compel more than those found in the U.S. It’s possible NEMD could capitalize on some of those opportunities, because it’s an actively managed fund.
Perhaps overlooked in the emerging markets debt conversation is the fact that interest-to-government revenue ratios across developing economy aren’t signaling imminent debt disasters. In fact, only a handful of widely followed emerging markets have interest-to-government revenue ratios in excess of that seen in the U.S. and Europe. That indicates that NEMD may be safer than initially meets the eye.
“In this context, EM offers a viable alternative to DM (especially US) bond markets, with higher real yields and more sustainable government debt metrics,” concluded Branet.
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