Despite Pullback, the Case for Em Bonds Remains Strong

Boston - Investor sentiment on emerging markets has swung negative in recent weeks on concerns over tariffs, trade, global growth and a resurgent U.S. dollar. However, we believe the long-term case for emerging markets (EM) in bond portfolios is still strong -- especially if you know where to look.

In fact, one of our major themes is investing away from the U.S., both in terms of the dollar, rate risk and fundamentals. In this blog post, we'll explain some of our thinking, and how we are approaching investing in EM bonds now.

Focus on the fundamentals

It's important to remember that developed and emerging markets are at different stages in their cycles. For example, in the U.S., we have low but rising inflation as the Federal Reserve unwinds its balance sheet and gradually hikes rates. U.S. GDP growth has been slow and steady, averaging around 2% the past few years.

In EM, the picture is quite different. Many individual countries are growing fast, and most central banks are not hiking rates. In fact, those that have been hiking have broadly been defending their currencies. Also, much of the economic growth in EM is organic, rather than being based on mergers, acquisitions and financial engineering.

EM currently offers high but generally falling inflation, which provides opportunities away from the U.S. into a more global positioning, the prospect of investing in higher real rates and an inflation hedge. Anti-globalization is in the headlines, but individual countries offer the opportunity for positive momentum as they find their own way in this new global environment. In EM, we certainly have political risk, but that offers opportunity for improvement. The impact of politics in selection may serve as an opportunity for differentiation and return, especially as developed central banks remove liquidity.

Credit quality is higher in EM from a broad balance sheet standpoint, with generally lower leverage. Also, as more investors become comfortable with the sector, EM companies can benefit from greater access to capital. And as EM companies tap the markets for financing, they have made improvements in transparency and disclosure. These are all signs of economies and markets maturing.