Emerging Markets Improvement Could Be Excellent for EMLC

It’s been another trying year for investors holding emerging markets assets, including bonds. On the upside, 2021 disappointment could give way to pleasant surprises in 2022, perhaps setting the stage for rebounds by exchange traded funds like the VanEck J.P. Morgan EM Local Currency Bond ETF (NYSEArca: EMLC).

emlc ytd

EMLC follows the J.P. Morgan GBI-EM Global Core Index and has been hamstrung this year by interest rate hikes across developing economies and trials stemming from the coronavirus pandemic, but some experts believe that those situations will ebb in 2022.

“On the pandemic, while the implications of the emergence of the Omicron variant are still being assessed, this time around vaccination rates are much higher than they were at the time of the Delta outbreak. That should limit the need for drastic containment measures and by extension the disruptive impact on economies,” according to BNP Paribas.

Regarding interest rates, as noted above, many emerging markets central banks beat the Federal Reserve to boosting borrowing costs, indicating that it’s possible that some of the countries represented in EMLC won’t see bond prices decline too heavily based on Fed rate tightening.

“Here, we believe that the balance sheets of most Asian emerging economies are quite healthy, so more resilient, when compared to these of the economies of eastern Europe, Africa and Latin America. The outlook, though, will depend on the pace and the extent of US interest-rate increases, especially given the recent more hawkish comments from the Federal Reserve chair on inflation,” adds BNP Paribas.

The $3.4 billion EMLC features exposure to debt issued by 20 countries, five of which are Asian economies. Bonds issued by China, Indonesia, and Thailand represent over 27% of EMLC’s weight. China and Indonesia are two of the world’s best-performing bonds markets this year, trailing only South Africa — another country represented in EMLC.

EMLC sports a tempting 30-day SEC yield of 5.48%, and its effective duration of 5.03 years puts it in intermediate-term territory. Intermediate-term bonds are usually less correlated to stocks than long-term debt, confirming that EMLC offers investors some diversification. Additionally, more than 76% of EMLC’s 345 holdings carry investment-grade ratings, indicating that credit risk is somewhat minimal with the fund.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.