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Emerging markets a ‘sweet spot’ for fixed income

Cash in various currency (including indian ruppees, Indonesia rupiah and Korean Won).

Speaking on a panel last week, BlackRock head of emerging markets fixed income, Sergio Trigo Paz said, if there were no major monetary policy changes, he expected emerging market local debt assets to deliver around 4%, and 5% for the coupon rate.

“This is a good outcome for a fixed income investor,” Trigo said. “If you think about hard currency it will deliver around -2% plus a 5% coupon, so then you get a total of 3%. This means emerging market fixed income assets will deliver within a spectrum of 3% to 9%.”

BlackRock deputy chief investment officer of global fundamental fixed income and head of global bonds, Scott Thiel said that monetary policy divergence was something to take into account when considering fixed income.

He said this included the expected rate hikes in the US and the impact of the country’s fiscal policy and tax cuts would have on the economy, the ECB that was “really doing nothing month to month”, and the Bank of Japan that was re-underwriting its monetary policies.

Thiel said this “policy divergence” along with global fundamental economic outperformance was positive for assets that did not have a lot of interest rate risk – in particular US interest rate risk – as a component of their overall risk.

“What we like are assets that benefit from those components, so we’re investing in local emerging markets,” he said.

The top funds

According to FE Analytics, the top emerging market bond fund with a local currency investment focus over the three years to 28 February 2018 was Aberdeen Global’s Frontier Markets Bond X Accumulation USD fund at 20.22%.

The fund had its highest holding of 6.4% in Egypt, followed by Honduras (3.6%), Ecuador (3.2%), Cameroon (2.9%), Rwanda and Kenya (both at 2.9%).

Top five European domiciled emerging market fixed income funds focused on local currency three years to 28 February 2018

 

Second and third place were also Aberdeen funds – Emerging Markets Corporate Bond A Accumulation USD fund at 10.13% and Select Emerging Markets Bond X Accumulation USD fund at 9.39%.

BlackRock’s Global Fund Emerging Markets Local Currency Bond Fund Class D3 USD followed at 7.66%, and Barings’ Emerging Markets Local Debt Trance A Accumulation USD at 7.48%.

The emerging market fixed interest sector average for the same period was at 1.31%.

The top funds were found using FE Analytics’ FCA Recognised universe that were domiciled in either Luxembourg or Ireland.

Jassmyn Goh

Jassmyn reported from Sydney to New York to Jakarta before joining Expert Investor. She was most recently Features Editor at Money Management and Super Review in Sydney.

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