Over the last 25 years, emerging market bonds have gone from a tiny new investment option to a broad asset class with several subsets. Here are three reasons some investors may consider emerging bonds to be appropriate for investment portfolios.
"Emerging debt' is a mixed bag of US dollar, local currency, and corporate debt, and what's considered 'emerging' varies across the sub-types and across time." Tina Vandersteel, GMO, May 2012
- Expanded Opportunity Set. One of the cornerstones of investing is the continual pursuit of diversification. Emerging markets broaden the investable universe of bonds considerably. Emerging markets bonds often march to the beat of their own drummer so there has been lower correlation to returns of other assets which is seen as an advantage.
- Attractive Balance Sheets with Opportunities for Growth. While the US and developed country peers are burdened with very high government debt coupled with an aging population, many emerging market countries were forced to clean up their act in the late ‘90s and early 2000’s. These less debt-burdened societies also have younger demographics which help with economic growth potential.
- Source: AdvisorAnalyst.com
- Higher Yield. The income generated from bonds is an important component of overall total return. In the US, Europe, and Japan, interest rates sit near zero. Compare the 5-year US Treasury, which yields 0.65% to Brazil where a 5-year government bond yields around 9% or China where yields are about 3.3% [Source: Bloomberg.com].
- Look at 10-year yields around the world below for more context [Source: Putnam.com].
Emerging market bonds are not without their risks. Currencies can fluctuate, impacting overall returns. Interest rates can rise and consequently impact portfolio values. There are a variety of political risks that must be evaluated in context with valuations when seeking exposure.
As you look to invest appropriately for the future, we think that emerging markets bonds, if allocated carefully, may be appropriate depending upon your circumstances.
Melissa Joy, CFP®is Partner and Director of Investments at Center for Financial Planning, Inc. In 2011, she was honored by Financial Advisor magazine in the inaugural Research All Star List. In addition to her frequent contributions to Money Centered blogs, she writes frequent investment updates at The Center and is regularly quoted in national media publications including The Chicago Tribune, Investment News, and Morningstar Advisor.
Investments mentioned may not be suitable for all investors. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. All prices and yields are subject to market fluctuation and availability. Past performance is not indicative of future results. U.S. government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. High-yield (below investment grade) bonds are not suitable for all investors. When appropriate, these bonds should only comprise a modest portion of your portfolio. Please note that international investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Melissa Joy, CFP® and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.