Looking for value? Get out of the United States.
Ashmore Group head of research Jan Dehn says there is a compelling case to be made for emerging market bonds. “Valuations are attractive relative to what is on offer in developed markets,” he says in a research note released to clients this week. “Emerging markets are now also very attractive in their own right.”
It’s not just about price. It’s also where the growth is coming from. After years of being out of favor, many emerging market nations are staging a comeback. Their GDP may not be something to write home about, but corporate earnings are improving or on the mend. The timing is right.
Three Reasons Why:
Ashmore is an emerging market fixed income specialist. So it is no surprise that they’re going to be fans of the asset class. But consider the following reasons why these bonds make for a strong value proposition compared to what many RIAs may be overweighting instead in their client portfolios.
- Average yield is around 6.5% in the local currencies. That’s at least 250 bips better than the GBI index-weighted inflation of just 4%. “For 4.5-year duration government bonds, this is a very high yield, particularly since fundamental stresses are easing,” Dehn says.
- GDP growth has been accelerating since 2015, mainly in Asia, but also in countries like Argentina. That country was once a favorite for Ashmore, just before Mauricio Macri became president. Bond investors were greatly rewarded for buying and holding Argentina debt. “There is a lot more upside given the large slowdown in growth between 2010 and 2015,” says Dehn about emerging market economies in general.
- Everyone is underweight this asset class. This is reflected in the price action in response to unwelcome news, which no longer induces large sell-offs. There are simply very few sellers left.
“The opportunity cost of investing in emerging markets is to forego returns in developed markets, but the latter look increasingly unattractive,” says Dehn.
