Emerging market debt is delivering better returns and lower risks than developed markets: Van Eck
Australian investors have not achieved optimal exposure to emerging market debt over the past decade because they have depended on a global bond strategy that has had far less emerging market debt than it should have based on returns and volatility, according to Eric Fine, Managing Director of Emerging Market Debt at VanEck.
Visiting Australian institutions this week, Mr Fine said emerging market debt has higher premiums and better fundamentals than developed market sovereign and corporate bonds and should be considered as a standalone asset class using an unconstrained approach.
“Based on fundamentals, emerging market debt is delivering better returns and lower risks than developed markets. Since a large portion of the world’s government bonds have low or negative interest rates, emerging market bonds have merited more attention. Investors should be considering emerging market debt as a separate asset class for its uncorrelated benefits to portfolio construction,” he said.
According to Fine, an unconstrained and nimble approach is the ideal way of investing in emerging market debt in the current market environment because it can more easily respond to adverse risks.
“The world is potentially over-leveraged with the developed marlet and China the main culprits. China’s debt keeps increasing, while its growth keeps declining. This cannot continue forever, especially when the debt may not be increasing economic productivity.
“From a US perspective, the US Federal Reserve is in a quandary. If it raises interest rates, it risks global leverage which will come back to hit the US economy, forcing the Fed to reverse course. If it maintains or magnifies monetary forbearance, savings rates have actually risen in countries with zero interest rates, meaning that growth takes a hit. Harder structural reforms are the answer, but Fed forbearance has prevented any sense of urgency from authorities.
“Europe has not addressed its central problem. The single currency is inconsistent with national fiscal policy and financial systems. When the next inevitable challenge arrives it is hard to see how ‘Europe’ can credibly promise that its next effort to federalise fiscal and financial policy will calm markets,” he said.
“A nimble and unconstrained approach can help avoid some of the current global risks for several reasons. First, it can more easily avoid local-currencies which are the most vulnerable to global risks, and instead be invested in USD-denominated emerging market debt. Second, many emerging markets’ sovereign and corporate bonds are both high-yielding and idiosyncratic, so should generate high returns without reference to many global risks. Finally, while many emerging market sovereign and corporate bonds are lower-yielding they are also very defensive, so should generate safer returns.
“An unconstrained approach can also take advantage of the shorter-term opportunities that arise in emerging markets’ currencies as the Fed keeps applying the same medicine of monetary forbearance, which can generate short-term boosts to asset prices,” Mr Fine said.