Fundamentals back EM bonds despite “risky” perception: VanEck

Fixed income investors have been urged to reconsider the “new reality” of emerging markets (EM) versus developed markets (DM) bonds, as new research from exchange traded fund (ETF) specialist VanEck argues the typical misconceptions could be “short-changing” investors.

According to the paper Emerging Strength: Why EM Bonds are the future of fixed income, investors should look to shed the longstanding “misconception” of emerging markets being “riskier” and increase their allocation to EM bonds to achieve improved risk-adjusted returns. The research also indicated that the state of government spending has effectively reversed in the last 25 years, with EM governments in surplus territory compared to DM governments now accruing deficits.

The research found emerging markets’ reduced government or total economy debt has provided central banks with the comfort and flexibility to effect monetary policy concentrated on battling inflation without having to worry about any flow-on impact on government financing. Developed markets also continue to be hampered by geopolitical tensions, while these tensions act as tailwinds for emerging markets.

“2025 has been marked by mass upheaval, and investors are having to challenge some long-held perceptions. The outperformance of emerging market bonds is not a new phenomenon, however geopolitical developments this year have brought alternative exposures into greater focus,” Arian Neiron, CEO of VanEck Asia Pacific, said.

“To many, emerging markets are synonymous with perceived risk due to several crises in in Latin America, Asia and Russia throughout the 80s and 90s. However, these crises were resolved decades ago.

“The irony is that many of the negative characteristics commonly associated with emerging markets, such as highly indebted governments, gross budget deficits, and loose monetary policy, are more accurately attributed to developed markets – a shift that has become particularly pronounced in light of the US’ burgeoning debt.”

VanEck’s analysis also examined the performance of passive and active ETFs within the Australian fixed income universe, and determined its VanEck Emerging Income Opportunities Active ETF (EBND) outperformed Australian hybrids, subordinated debt and corporate bonds to be the top performing fixed income asset class in Australia over the one-year and three-year timeframes.

The paper also suggested an “active, unconstrained approach” – like that taken by the ETF – would benefit investors in navigating the “idiosyncrasies between the nations included in the EM universe and the nuances between the different types of bonds available”, well positioning investors to allocate to EM bonds as “the future of fixed income”.

“The superior risk-return profile of emerging market bonds reflects a new reality where the hegemony of developed markets can no longer be taken for granted,” Neiron said.

“We have observed the fiscal prudence of many countries in the Asia, Latin America and Eastern Europe regions, which stand out for having low-inflation, stable currency environments conducive to sustainable growth. We are also cognisant that emerging markets are not a monolith, and countries that have demonstrated fiscal strength historically are not immune to monetary missteps.

“Taking full advantage of the opportunities in emerging markets debt, we think, requires an unconstrained active approach, and strategies like VanEck’s active emerging markets bonds ETF provide access to this market.”