Australian investors do not have optimal exposure to emerging market debt thanks to a dependency on global bond strategies that have far less of this debt than it should, according to VanEck.
VanEck said an unconstrained and nimble approach was the ideal way of investing in emerging market debt as it could more easily respond to adverse risks.
VanEck managing director of emerging market debt, Eric Fine, said the debt had higher premiums and better fundamentals than developed market sovereign and corporate bonds, and should be considered as a standalone asset class.
“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,” he said.
Fine said a nimble and unconstrained approach could help avoid some of the current global risks.
“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,” he said.
“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.”
Fine noted that the world was potentially over-leveraged with the developed market and China was the main culprit.
“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,” Fine said.
