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EM bonds a likely post COVID-19 winner

emerging market bonds

Emerging market bonds are likely to bounce back and outperform those from developed markets in a recovery from the COVID-19 downturn.

Emerging market bonds are likely to bounce back and outperform fixed income offerings from developed markets during a recovery from the downturn caused by the coronavirus pandemic, an exchange traded fund manager has said.

VanEck emerging markets fixed income strategy portfolio manager Eric Fine said the high number of investors favouring ‘safe’ or lower-risk assets as a result of the impact of COVID-19 on global markets has caused yields on government bonds to drop below 1 per cent in many developed nations and could lead to a renewed interest among investors in emerging market bonds.

“Investors who have piled into long-duration government bonds risk those assets underperforming higher-yielding bonds when an economic recovery eventually comes and inflation rises,” Fine said.

“In contrast, when the coronavirus crisis peaks and passes, liquid emerging market sovereign bonds and liquid high-carrying local bonds could rally on strong demand.”

While some emerging markets, such as Thailand and the Philippines, had performed well in the current environment, he pointed out this did not mean all emerging markets bonds would be good performers.

According to Fine economic conditions varied from country to country and potential investors should choose wisely.

“Pick your winners and losers by investing through an active fund manager. Winners can generate huge gains without correlation to global problems. Losers can generate huge losses, whether the world turns out okay or not,” he noted.

Fine also highlighted increased support for emerging market economies from global authorities as a significant factor in the likely success of emerging market bonds.

“The International Monetary Fund is increasing its lending facilities. The G20 is looking to guarantee near-term US dollar payments on the eurobonds of poorer and smaller countries. The Paris Club of rich bilateral lenders is looking to suspend debt payments by poorer emerging market countries,” he said.

“Swap lines with key emerging markets, like Mexico, reduce the risk of dollar runs becoming self-fulfilling. The US Federal Reserve is responding to every fire they see, and quickly, much more so than during the global financial crisis.

“Broadly speaking, emerging markets have what you want in a debt investment. Treasuries that respect limits on debt issuance. Central banks that view their jobs as defending their currencies and bond markets, not propping up stock markets. Governments that will fail if inflation gets out of control. This is why emerging markets performed so well after the global financial crisis and could continue to do so after the coronavirus pandemic wanes.”

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