Traditionally, this is a particularly difficult situation for emerging countries. Some of their markets are much smaller and more unstable than those of the large industrialized countries. For example, as soon as the large US pension funds find higher bond yields at home and withdraw their money elsewhere, this can lead to strong reactions on the markets in the affected emerging markets and corresponding consequences for the respective economic development.
Michael Ganske, an expert on emerging market bonds at the US fund company T. Rowe Price, therefore admits: “Investors are nervous about the U-turn by the US Federal Reserve. But we don’t expect the violent reactions that became known as ‘Taper Tantrum’ in 2013. At that time the U-turn came as a surprise, today everyone is well prepared. “
The so-called taper tantrum was a slump in the bond markets, following the surprising announcement by the then Fed chief Ben Bernanke that it would soon begin with “tapering”, ie the curbing of bond purchases. Manfred Bucher from BayernLB also emphasizes that this time the Fed’s turnaround will be “anything but surprising”.
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The emerging countries definitely have some catching up to do. “Since the beginning of the year, local currency bonds from emerging markets, as measured by the JP Morgan GBI EM Index, have lost around six percent,” explains Ganske. Two percentage points of this were due to exchange rate losses due to rising yields, the remainder resulted from the weakness of local currencies.
Ganske concludes: “From our point of view, there is now potential in the market.” From his point of view, the bonds from these regions are primarily interesting because of the high current income and less because of the expected price gains.
A fund is usually the best choice for private investors. If you want to buy paper directly, you should look at euro bonds from countries such as Hungary, Poland, the Czech Republic or Romania.
Ganske admits: “There can be temporary exchange rate losses there, but the probability of default is low because the euro area is a kind of anchor.” Especially with regard to Hungary and its controversial head of government, he adds: “Viktor Orban is politically controversial, but the economic data have greatly improved under his government. “
Hard currency bond funds
Those who rely on bond funds have various options. For example, there are products that focus on hard-currency bonds, i.e. on interest-bearing securities that are not quoted in local currency but, for example, in US dollars or euros.
This has the advantage that there are fewer or no currency risks there, but the opportunities for returns are also lower. An example of this is the Barings Emerging Markets Debt Short Duration Fund. This actively managed fund focuses on government and corporate hard currency bonds with short maturities. The largest positions are in China, India and Ukraine.
The also has a similar focus Emerging Market Aggregate Bond Fund from BlueBay, which is based on the benchmark indices in terms of maturities. Papers from the United Arab Emirates, Brazil and India are particularly well represented there.
Local Currency Bonds Fund
The Capital Group’s Emerging Markets Local Currency Debt Fund. This is based on the JP Morgan EMBI Global Diversified Index, which is an important benchmark for emerging market bonds from countries in local currencies. The focus is on government bonds from China, Indonesia, Mexico, Russia and Brazil.
Jan Richter from the consulting firm Fondsconsult, however, recommends broadly diversified funds. Among the funds in local currency, index-oriented products are strongly focused on individual emerging markets such as Brazil or Indonesia.
He considers them to be very susceptible to abrupt capital outflows. “For private investors, there are several arguments in favor of investing in funds that are not based on the index and invest more broadly. For example, frontier markets that are less dependent on the global financial cycle are more represented in such funds, ”says Richter. Frontier markets are second-tier emerging markets such as Vietnam, Kazakhstan and Egypt.
An example of a broadly diversified fund that invests in local currency bonds also in frontier markets as well as in traditional emerging and industrialized countries is the Capitulum Weltzins-Invest from Universal.
Mixed funds
Those who want to diversify risks can also invest in funds that mix emerging market bonds in hard currency and local currency, such as the Emerging Market Total Return Debt Fund from Lazard. This pursues a so-called total return approach. The focus is on the goal of always achieving a positive return – regardless of whether the prices on the markets rise or fall.
More: Low valuations and growth opportunities – emerging markets could make a comeback