The potential for attractive returns, economic growth, and selectively low valuations can make emerging market (EMs) bonds appealing to investors, as per Allianz Global Investors. Building on that, the asset manager states that the time for investing in the asset class is now, as EMs have lower inflationary pressure than developed markets (DMs). 

“Inflationary pressures are fading, China’s reopening is boosting broader emerging markets growth and commodities exports. And a sizeable carry – the return for holding a bond over time – may now be on offer. We think there are several good reasons for investors to look at emerging market-debt once more,” writes Carlos Carranza, Portfolio Manager, Emerging Markets Debt at Allianz Global Investors. 

The first reason, as per Carranza, is that emerging market bond yields are close to 10 -year-highs. This would provide a considerable ‘carry buffer’ even after excluding nations with the highest yields. Thus, even without a change in bond prices, investors would make more money on their investments. And a price rise will be adequate to counter any market volatility, claims the asset manager. 

The second reason is that emerging market bonds have done well amid US interest rate policy changes, claims Carranza. According to him, EM hard currency sovereign bonds exhibited double-digit returns during the last two US monetary tightening cycles, one ending in June 2006 and the other in December 2018. 

“Economic prospects for many emerging markets have improved – with the growth gap between emerging and developed markets remaining wide – while inflation is slowing,” states Carranza, offering this as the third reason.

Finally, the asset manager says that valuations for many sovereign bonds are cheap by historical standards, making the asset class an exciting prospect for investors. 

“Overall, we see reasons for optimism for emerging markets. The combination of improving economic fundamentals and favourable valuations may set the stage for opportunities for investors willing to take a selective approach,” the asset manager concludes. 

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