Consider EM bonds for income: VanEck

Australian investors would be wise to consider emerging market bonds as an alternative source of income as interest rates reach record lows, according to VanEck.

With rates cut to 0.1% last week by the Reserve Bank of Australia, this presented a problem for investors seeking an income in a low-rate world.

However, VanEck suggested, emerging market bonds could be a way to achieve higher rates with a lower risk. While they were sometimes perceived as being risky, the firm said certain countries in the region were as liquid and structurally sound as developed countries. They also boasted foreign exchange reserves, strong budgets and robust balance of payments which enabled them to protect against economic shocks.

There were two ways for investors to access it; as part of a bond allocation or as a separate asset class on its own. It was also important for investors to consider if they accessed it via an active or passive vehicle. Using active management would enable managers to avoid the weaker countries in favour of those countries which were better protected against shocks.

Arian Neiron, managing director and head of Asia Pacific at VanEck, said: “Emerging markets bonds can improve the returns of diversified portfolios as part of a fixed income allocation. They can also improve the risk-adjusted returns of diversified portfolios that treat emerging markets bonds as a separate asset class.

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“Investors are rewarded for emerging markets bonds because they pay a higher premium for the same fundamentals as developed market debt. Yet most Australian investors do not have an allocation to emerging markets bonds.”