The third name, Fidelity Emerging Market Debt, can invest in both sovereign and company debt, but the majority of its biggest 10 positions are in government bonds. The fourth and fifth funds, offered by Neuberger Berman and M&G, both have more exposure to government bonds than credit.
As such, there are plenty of ways to approach the emerging market space. But although the most successful managers can deliver outperformance through a variety of individual strategies, investors are likely to remain beholden to macroeconomic developments.
As BNY Mellon’s team notes: “External factors have continued to be the biggest drivers of emerging market performance.” These range from global growth dynamics to the Federal Reserve’s plans for interest rate moves, developments in the trade war between the US and China, and more general sentiment in markets.
When it comes to risk sentiment, investors still appear cautious in the wake of the sell-off that hit markets in the final quarter of 2018. Growth has slowed in a number of developed economies, with the recent stoking of trade war tensions doing nothing to help the situation. Investors may also fret about the substantial levels of debt some emerging market nations have built up. The Financial Times reported in May that public debt levels across emerging markets were nudging half of annual output for the first time, citing data from the Institute of International Finance. With emerging market countries paying average interest rates of 5 per cent on their foreign currency debt, and even more on local currency bonds, some may fear the burden is too much.
But there are also reasons for optimism. For one, emerging markets received a major respite earlier this year via the Fed’s decision to back away from its previous intentions to raise US interest rates further during 2019.
‘High’ yield
EMD investors may yet benefit from another trait investors are finding attractive: high yields in an asset class where the payout tends to be meagre. The BNY Mellon fund does not break out its own yield, but lists the “average coupon” as 6 per cent. The Amundi offering lists its yield as 6.84 per cent. These stand in stark contrast with bond markets in developed nations, where even some of the riskiest corporate debt now offers underwhelming yields after years of strong capital returns reduced future payouts.
Recent analysis by Money Management’s sister title Asset Allocator, an email newsletter for discretionary fund managers, shows that professional investors are getting better yields on EMD than the high-yield market.
An assessment of funds favoured by DFMs found that popular EMD names tended to pay out more than widely backed high-yield products. For example, both M&G Emerging Markets Bond and a local currency sovereign bond tracker offered by L&G yielded more than 6 per cent earlier this year.
