Emerging markets bonds “almost safe haven”

The events from the last few weeks have put the spotlight on emerging markets (EMs) bonds, particularly selected local-currency bonds, which according to VanEck, almost exhibited signs that they were a safe haven asset in the current environment.

What is more, the recent analysis showed that EMs bonds outperformed their developed markets (DM) peers in March.

Eric Fine, VanEck Portfolio Manager, Emerging Markets Fixed Income Strategy, said that almost all emerging markets currencies rallied following US central bank’s response in March to the banking crisis sweeping across Europe and the US.

But there was only one EM currency that was weaker and this was the Mexican peso and Argentine peso was still non-investible option.

“The market is connecting the dots on the implications of the current crisis, and there are two – the attractiveness of EM bonds and the correlating unattractiveness of developed markets bonds. We expect money from one to flow to the other,” Fine said.

He added that there was a push out of developed markets into EM as the US yield curve was pricing recession but had not yet escaped inflation fears.

“The market view is that Fed hikes increase recession risks while easing keeps the inflation genie out of the bottle. By way of contrast, most EM countries don’t have these problems. For example, even a “problematic” country like Brazil sports 13% rates and 5% inflation,” VanEck’s portfolio manager noted.

The reason why EM economies were in better shape than developed markets is because EM central banks were generally ahead of the inflation curve and hiked interest rates earlier and more aggressively.

Also, many EMs export more than they import and benefitted from higher prices, unlike developed markets which experienced higher commodity prices as a price shock.

“This dynamic means emerging markets are good creditors in dollar terms and have dollars on hand to stabilise their local currency if needed,” Fine concluded.

“Emerging markets debt stands out as having asset prices that can benefit directly from China’s reopening with its higher yielding bonds that can generate returns in a potentially sideways, choppy or bumpy bond world. Many emerging markets stand out as beneficiaries of the current environment not as victims of it.”