- Lower yields in developed markets are boosting demand for emerging markets bonds.
- Rate hikes by the Fed or China worries may cause setbacks, but many developing economies may have improved resilience.
- Many bonds offer attractive risk-adjusted return potential. Currency tailwinds have picked up, as have economic growth and reforms prospects.
Gains in 2016 and 2017 have thrust emerging markets bonds back into the spotlight after years of uneven returns. The rally in emerging markets debt has some investors considering whether they should add or increase exposure to the asset class in their portfolios. Investors are also evaluating whether the turnaround in emerging markets bonds is sustainable. We believe the following are key reasons to be constructive:
- Despite setbacks, governments are making gradual progress on reform efforts.
- Commodity prices have stabilized, while currencies are appreciating.
- Many economies and governments’ finances are relatively sound.
- The flexibility of emerging markets to respond to macro shocks has improved.
- High yields are attractive in a lower yield world.