Many financial assets will benefit from the new path taken by the US Federal Reserve (Fed) this week. That of lower interest rates. One of the most obvious is fixed income securities. But in the world of debt issued by governments and companies, the possibilities are numerous. One of those that could benefit the most is emerging market fixed income securities.especially in local currency, according to various industry experts. Of course, this is an investment that is only suitable for those who are willing to take the risks.
The Fed cut the price of silver by half a percentage point last Wednesday, leaving rates in the 4.75% to 5% range. This move is not only having an impact on the United States. The move taken by the American organization for the first time in four years is having repercussions on other economies around the world. “In emerging markets, we believe that the introduction of a cycle of cuts by the Fed will allow local central banks to cut rates more aggressively than currently expected. Real rates are too high for these economies where disinflation is more advanced than in developed markets,” said Kevin Thozet, member of the investment committee of Carmignac in a report.
Vontobel: “All emerging market debt subcategories will benefit from lower global interest rates”
If emerging countries do indeed start to ease their monetary policies, their debt should benefit. In addition, there is another effect. By reducing the yield that developed country bonds will offer investors, emerging countries can receive this money. This is what Carlos de Sousa, CEO of Vontobel, explains: “All subcategories of emerging market debt will benefit from the decline in global interest rates. As global risk-free interest rates decline, financing costs will decrease and increase their relative attractiveness compared to developed market alternatives.” “We expect asset allocators to take on additional risks to achieve a sufficiently high expected return. This will likely result in inflow into emerging market debtwhich should provide support to emerging market spreads over the next 12 months,” the expert explains.
All this, combined with now more controlled inflation levels, leads many managers to be positive on emerging fixed income, such as Fidelity, which in its latest monthly report published this week said it maintains “the overweight on emerging local duration, as the disinflation situation remains solid in these countries. The outlook is positive despite the profits already accumulated this year; the Bloomberg EM Local Currency Govt Index, for example, is up 4.59% in 2024 after rallying more than 4% since early August.
Products on the radar
The easiest way to get exposure to this debt is through investment funds. Among the most profitable emerging debts issued in local currency this year (the funds are in euros) are: Templeton Emerging Mkts Bd A(Qdis)EUR, Ibercaja Emerging Bonds A either Amundi Fds EM Lcl Ccy Bd A EUR.
Franklin Templeton product tops the ranking ranking with a yield of 7.34%, according to Morningstar data this year, with bonds that have a weighted average coupon of 7.09%. This fund invests in the debt of countries such as Uruguay, Ecuador, Egypt, Malaysia and Kenya, which are among its main positions. Almost 6% obtain the Ibercaja vehicle. “We continue to prefer the debt of Latin American countries to that of Asian countries,” said the bank’s manager in his latest half-yearly report. For its part, the aforementioned Amundi fund invests a good part, 71.5%, in public debt, among which the issues of Malaysia, South Africa, the Czech Republic, Romania and Poland stand out.
Fixed income securities have had a tough time in recent years, during which it has not been easy to accumulate profits. Thus, high annualized returns over 3 years are not currently found among emerging funds. However, some products stand out with annual returns above 4%. This is the case of Candriam Bds Em Dbt Lcl Ccis N EUR Cap, BGF Durable EM Lcl Ccy Bd I2 And Colchester Lcl Mkts Bd UnhdgAccI. The first two are also among the most profitable this year (see graph). Another fund that is among the top positions in 2024 and in 3 years is PIMCO GIS Emerg Lcl Bd E EUR UnH Acc.
