Emerging Markets  

Insight: Global Emerging Markets Bond funds

Insight: Global Emerging Markets Bond funds

After many years of stagnation, emerging markets finally witnessed a return to form in 2016. In what was a rampant period for equity markets in general, emerging world performance was nonetheless head and shoulders above a number of developed countries. Just as equities were able to shrug off political risk, so too did emerging market bonds emerge relatively unscathed from the election of a US president promising more aggressive trade policies.

Emerging markets, specifically China, had enjoyed a rich period of growth in the previous decade, with many investors enjoying spectacular returns as a result. But that went into reverse from 2013 onwards as the Bric nations – particularly Brazil, Russia and China – experienced a variety of economic difficulties. 

That was until 2016, where a rebound for Brazil and Russia in particular helped restore confidence in emerging markets. Emerging market bond investors tend to have a slightly different investment focus – bonds issued by corporates and countries from around the world rather than relying heavily on the Bric nations – but they too saw returns improve.

Emerging market debt (EMD) has been a niche asset class for retail investors for many years, but it is starting to become more prominent. The creation of the Investment Association’s Global Emerging Markets Bond sector in 2014 was the latest evidence that the area is edging its way into the mainstream.

At a time of low yields globally, the rates of interest on offer from EMD have also become more attractive, even though this is a reflection of the increased likelihood of default for such bonds.

 

Booming bonds

The good news for the asset class has continued this year: statistics suggest bond sales in the developing world are booming. According to data from research firm Dealogic, emerging market countries sold record levels of sovereign debt during the first quarter of this year, equivalent to almost $70bn (£54m). Impressively, this was a 48 per cent uptick from last year and the highest amount ever for a single quarter. 

Regionally, Africa, eastern Europe and the Middle East garnered the most interest, accounting for $39.1bn in sovereign bonds. The Americas and Asia proved to be less popular, attracting sales of $22bn and $8.4bn, respectively.

 To add further weight to this trend, the turn of the year has seen healthy inflows into emerging market bond funds. According to data from the Investment Association, a total of £266m poured into the sector from January to March, making it the second most popular fixed income sector so far during 2017, lagging only Sterling Strategic Bond funds, which have attracted net sales of £714m.

By contrast, the final quarter of 2016 had seen £340m leave the EMD sector as investors briefly grew nervous over the impact of president Donald Trump’s policies.

 

Performance

Under Investment Association rules, to qualify for the Global Emerging Markets Bond sector, funds must invest at least 80 per cent of their assets in EMD as defined by a recognised Global Emerging Markets Bond index. In addition, they must be diversified by geographical region. 

Historically, Asia has been a particular hub for emerging market equity managers. As mentioned, it is a slightly different story for bond investors, with Eastern Europe, Middle East and Latin America among the main areas of focus.