Look to Emerging Market Bonds for Income

Asia fixed income offers low returns at a very low risk level, while Africa fixed income has the potential for very high returns, but at the cost of very high risk, says Investec's Peter Eerdmans

Holly Cook 20 May, 2015 | 6:30AM
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In the current low-growth environment, emerging market yields really stand out, trading as they are at multiple-year highs. This was the bottom line of a recent presentation given by Peter Eerdmans, co-head of emerging market fixed income at Investec, at the Morningstar Investment Conference in London. “These are essentially investment grade asset classes with real yields that would be at an all-time high if it wasn’t for the credit crisis, versus negative yields for developed market debt,” Eerdmans told the audience.

Homing in on emerging market corporate bonds, the Investec manager, who runs the Investec Emerging Markets Corporate Debt fund and Bronze-rated Emerging Markets Local Currency Debt fund, said despite strong performance over the past year, such investments still offer a bit of an emerging market premium. EM corporations offer better yields on their bonds while employing less leverage than their developed market cousins, making them an “interesting proposition.”

That said, there have been multiple challenges facing the asset class of late. The end of the commodity super-cycle, rebalancing in China, and the reduction in liquidity related to the ‘taper tantrum’ in 2013 have all weighed on the opportunities available across emerging markets. However, Eerdmans pointed to a number of reasons to be optimistic: recent election results across the region have been largely positive, namely India and Indonesia; in other countries, the issues on the political agenda have been centred around improving economics and reducing corruption; market pressures are continually encouraging reform, with China in particular pushing through improvements in corporate governance; and the cutting of fuel subsidies in India and Africa have also laid the path for more capital to be invested in corporate growth.

Across the emerging market area – a region that is far from homogenous – Eerdmans highlighted Asia fixed income among the lower-risk, lower-return opportunities. Further up the return curve, he said his team likes emerging market corporate debt for slightly better returns but will at a relatively low level of risk. If willing to take more risk in the hunt for a greater return, local currency emerging market debt is an interesting area, he said. While, for investors who can stomach a very high level of risk in return for the potential to achieve very high returns, African fixed income is the area Eerdmans is most interested in.

Within Africa, Eermans’ portfolios typically have overweight allocations to Ugandan and Nigerian investments – two challenging areas but ones where recent elections offer encouragement.

Top-rated Emerging Market Bond Funds

Templeton Emerging Markets Bond – rated Silver by Morningstar analysts

Neuberger Berman Emerging Market Debt Hard Currency – rated Silver

Investec Emerging Markets Local Currency Debt fund – rated Bronze

See the full list

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Holly Cook

Holly Cook  is Manager, Morningstar EMEA Websites