One place to look for income now
Emerging market (EM) debt is enjoying robust returns this year. Is this asset class worth considering? We believe it is in today’s post-Brexit world, and this week’s chart helps explains why.
The chart above shows how EM debt yields have remained elevated, while those in developed markets have turned low to negative . EM debt has long offered attractive income, but weak fundamentals made it a somewhat risky proposition. We now see the asset class poised to benefit from the ongoing investor search for yield , as three key headwinds to emerging markets have turned into tailwinds.
Headwinds have become tailwinds
The risks that seem to have abated: U.S. dollar strength fueled by monetary policy divergence in developed markets, sharply falling commodity prices and worries about China’s growth and a potential currency devaluation.
Expectations for Federal Reserve (Fed) rate hikes slumped further after the Brexit vote. Uncertainties around the health of the global economy and the upcoming U.S. election are expected to keep the Fed on hold. Oil prices have recovered, leveling off at around $45 to $50 per barrel. Lastly, growth in China appears to be stabilizing. We do not expect an impending Brexit to derail recent “green shoots,” or signs of economic recovery, in some EM economies following two years of subpar growth. There are risks to our outlook, such as a U.S. inflation pickup leading to higher yields. We’re also paying close attention to market liquidity conditions, global funding stresses and capital flows in China. The attempted coup in Turkey on Friday underscores the political risks in the emerging world.
Yet the segment still looks attractive given persistently low developed market bond yields. We believe this relative yield advantage will be a main driver of EM debt returns in the second half. We see hard-currency EM debt providing a more stable income stream than local currency options. EM local debt may offer more upside, however, for those willing to accept currency risk. Read more market insights in my Weekly Commentary .
Richard Turnill is BlackRock’s global chief investment strategist. He is a regular contributor to The Blog .
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Investing involves risks, including possible loss of principal. International investing involves special risks including, but not limited to political risks, currency fluctuations, illiquidity and volatility. These risks may be heightened for investments in emerging markets. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of July 2016 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking" information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. ©2016 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners. USR-9819 https://www.blackrockblog.com/2016/07/18/look-for-income-em-debt/
