Even More Reasons to Allocate to EM Debt | ETF Trends

By Natalia Gurushina
Chief Economist, Emerging Markets Fixed Income

Majority of investment Grade EMs and several High Yield EMs have a lower perceived risk of default in 1 year than the U.S.

U.S. Debt Ceiling

There are many good reasons to allocate to EM debt, and now you can find another one right on your Bloomberg screens. The U.S. is a AAA-rated economy (the top sovereign rating bracket), and we are seriously discussing a possibility of default in the next few months (the debt ceiling debacle).

The 1-year credit default swap (CDS) spread for the U.S. is currently wider than 1-year CDS spreads for the majority of lower-rated Investment Grade emerging markets (EMs) – including Uruguay, Peru, Mexico, Chile, Panama, Czech Republic, Kazakhstan, Poland, Qatar, Kuwait, Saudi Arabia, Israel, Bulgaria, Hungary, Romania, Thailand, Philippines, Indonesia, India, China, Malaysia and South Korea (see chart below).

EM Credit Quality

The 1-year CDS spread for the U.S. is also wider than 1-year CDS spreads for the whole bunch of High Yield EMs – including Brazil, Costa Rica, Guatemala, Oman, Morocco, South Africa, Bahrain, Serbia and Vietnam.

Let this sink in. Stay tuned!

Chart at a Glance: Perceived 1-Year Default Risks in U.S. and EMs

Chart at a Glance: Perceived 1-Year Default Risks in U.S. and EMs

Source: Bloomberg LP.

Originally published by VanEck on April 26, 2023.

For more news, information, and analysis, visit the Beyond Basic Beta Channel.

PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan’s index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG – JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice.  This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein.  Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results.  Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed.  Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change. The information herein represents the opinion of the author(s), but not necessarily those of VanEck. 

Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity.  Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.

All investing is subject to risk, including the possible loss of the money you invest.  As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money.  Diversification does not ensure a profit or protect against a loss in a declining market.  Past performance is no guarantee of future performance.