Emerging Markets Can Give Investors the Yields They Desire

U.S. Treasury yields have been ticking higher recently, but for investors in search of even more yield, there are opportunities to be had in emerging markets (EM) debt. Countries like Egypt and Turkey, in particular, can expose investors to higher returns.

Per a Bloomberg article, “investors are looking past country-specific risk factors, such as anti-government protests in Egypt and discord between Turkey and the U.S. An added bonus is that slowing inflation in emerging markets has boosted their real yields.”

“Buoyant real yields help make a stronger case for emerging-market bonds,” said Takeshi Yokouchi, a Tokyo-based senior fund manager at Sumitomo Mitsui DS Asset Management Co., which oversees the equivalent of $160 billion. “It’s a good time to start buying them as inflation in many of the economies has slowed and more rate cuts are expected for some of them.”

Key data to consider per Bloomberg:

  • “The extra real yields that emerging markets offer overdeveloped nations held at 302 basis points in October, increasing almost five-fold since 2013
  • Inflation-adjusted yields in advanced economies stand near the lowest level since at least 1997, based on data available. The Federal Reserve and the European Central Bank have been loosening policy, while the next move by the Bank Japan looks more likely to be easing than tightening
  • The U.S. real yield stands at zero, while that for Germany is at minus 1.35% and Japan at negative 0.37%
  • Emerging-market bonds have gained 1.7% in the past three months amid growing optimism over the first phase of a trade deal between the U.S. and China. Reduced demand for haven assets saw debt in developed economies lose 1%
  • Despite offering the third-highest real yield among 24 markets, the returns on South African bonds have trailed other emerging markets. They lost 2.5% last week, the most since March 2017, as bailouts for state power company Eskom Holdings SOC Ltd. threatened to worsen the nation’s fiscal deficit and Moody’s Investors Service moved closer to downgrading the nation to junk
  • Turkey’s local-currency sovereign debt climbed almost 1% this week through Thursday, South Africa rose 0.9% and Egypt up 0.4%”

For investors looking for the continued upside in emerging market assets, whether driven by a weakening USD or continued developments around trade, the Direxion MSCI Emerging Over Developed Markets ETF (NYSEArca: RWED) offers them the ability to benefit not only from emerging markets potentially performing well but from emerging markets outperforming developed markets.

For more relative market trends, visit our Relative Value Channel.