- US interest rate reversal is a long time coming. In spite of persistently low interest rates, bonds are attractive. Recommended: focus on emerging markets
- “Investment grade emerging markets corporate bonds offer higher yields than comparable bonds from the developed countries"
The interest rate reversal is a long time coming. The US Fed has pushed back a decision on a rate hike to December, citing the uncertain outlook for the global economy as reason, among others. At the same time the ECB president, Mario Draghi, has hinted at the fact that the ECB might expand its bond purchase programme considerably. This keeps the interest rates, both for government and for corporate bonds, at historically low levels. “In this environment it is difficult for many investors to achieve a satisfactory yield,” as Péter Varga, fund manager and specialist for emerging markets corporate bonds at Erste Asset Management, explains. “As alternative, we recommend investors to take a closer look at investment grade bonds from emerging markets issuers.”
Stimulus package in China and weak economy in Brazil
“We currently rate the situation of the emerging markets as mixed,” as Varga points out. The semi-annual figures of the corporate sector in the emerging markets were anything but convincing, but the stimulus package announced in China creates new opportunities. The government in Beijing announced that the equity portion for property purchases was to be cut. At the same time, a tax break will be granted for the purchase of a compact car. The situation in Brazil, on the other hand, remains difficult and diffuse in the foreseeable future. “We are critical of the country due to the political instability and the generally weaker economy,” as Varga explains. A careful selection of the right assets in the emerging markets is therefore key.
Erste Asset Management offers interested investors suitable access to this investment universe via its Espa Bond Emerging Markets Corporate IG fund, which was floated three years ago. The investment focus of this fund is on investment grade bonds from the emerging markets. The fund is eligible in accordance with the Austrian Insurance Supervisory Act and thus also interesting for a number of institutional clients. It is also hedged against currency fluctuations and commands a good rating.
“From our point of view there are numerous factors supporting an investment in investment grade emerging markets bonds,” as Varga points out. It is generally a fast growing, broadly diversified asset class with bonds from many well-known, internationally operating companies such as for example Alibaba from China, or Grupo Bimbo from Mexico. At the same time, the rising capital inflow ensures liquidity. Overall this asset class is dominated by real-economy companies. Industrials account for 57.1%, whereas for European investment grade bonds, this percentage is only 47.1%. “Another reason to invest, from our point of view, is also the structurally favourable, i.e. lower, valuation of emerging markets corporate bonds vis-à-vis the industrialised countries. In recent years, the spreads on investment grade companies from the emerging markets have been a stable 2-2.5% above those of corporate bonds from developed countries in spite of negative market phases,” highlights Varga.
Operating since 2007, Erste Asset Management has years of experience in the asset class of emerging markets corporate bonds. The company successfully combines local know-how with global strategies. Over the years, Erste Asset Management has recorded a constant inflow of assets and has received numerous national and international awards.