Advisors may want to up their emerging market bond allocations

investmentnews.com:

Yes, there is risk in emerging market bonds – but not as much as many advisors and investors believe. And especially not in the current global economic environment, says Eric Fine, head of emerging markets active debt at VanEck.

In Fine’s view, emerging market bonds will outperform developed market, or DM, issues as a result of lower debt levels, sound economic policies, and better risk-return profiles in a large number of emerging market bond markets. A recent report from Fine’s team at VanEck says high debt and deficits in developed markets have limited the traction of monetary policies.

Meanwhile, the report says emerging markets have maintained more advisable fiscal and monetary strategies, allowing for greater policy flexibility. Furthermore, the VanEck study showed that EM deficits, most notably in Asia, are consistently lower than those of developed markets and are forecast by the IMF to continue to be so.

As for geopolitical risk, which tends to be the prime reason that advisors avoid any type of EM investing, Fine says many of those the problems are actually tailwinds for EM bonds.

“They tend to be commodity supply stories and most of EM, certainly dollar-denominated bonds, many of them are commodities exporters,” said Fine. “So these things that advisors look at as risks to most of their portfolio, EM bonds are winners while paying you high yields.”

As for those high yields, one specific issue that Fine likes is a dollar-denominated bond issued by Mexican oil company Pemex, which yields 9.4 percent and matures in 2027. Another example in local currency is a Brazilian bond that yields 10.5 percent in a nation where inflation is in the 4 percent to 5 percent range.

“They were hiking way early,” said Fine. “And