When it comes to investing, emerging markets have always been at the crossroads of low costs and the ever-present potential of exponential short-term growth. Bargain investors have always looked at emerging markets as a chance to get in on the ground floor of an economy that could boom if all of the right factors fall into place. We saw this for the better part of the last decade with China and India, and now currently with densely populated regions with growing middle classes like South East Asia, Latin America, and some parts of Europe.
Emerging markets always come with inherent volatility that accompanies any investment with the potential to exhibit rapid growth. Just as the stock market has shown even more volatility during the COVID-19 pandemic, so too have the bond markets, especially the bonds for emerging markets. In late March of this year, during the initial peak of the global pandemic, these EM bond markets crashed by over 16% which was the worst decline since the last recession in 2008-2009. The bond markets mirrored the stock markets in this drop as the global economy temporarily entered a recession, even though just months later the major indices were all trading again at all-time highs. To avoid a complete economic shutdown, Central Banks around the world aided the economy and added liquidity to the markets, most notably the United States Federal Reserve.
With the increase in risk are EM bond markets worth investing in right now?
Sure, if you have a long-term horizon and can stomach some more volatility in the short-term as well as a bit of uncertainty mixed in. If you have some space in your portfolio for the risk, emerging markets can be an incredible long-term play for investors who just like to put their money into something and let it do its work overtime. The EM bond market is currently valued at nearly $3 trillion and is rapidly growing in popularity, especially considering the uncertain times we are currently in. Globally, Central Banks are lowering interest rates to help support their respective economies, which of course gives bond investors an advantage as it allows them to have a nice window for profitability.
Investors should continue to monitor how coronavirus continues to affect markets heading into 2021. The inherent risk with emerging markets is that quite simply put, they may not have the resources or infrastructure to deal with sudden shocks that may have an effect on both local and global economies. Because of this, we see plenty of migration both to and away from EM bond markets, depending on the investor’s risk tolerance. Emerging market bonds that are denominated in U.S. dollars the current price of yield-spreads are still above pre-COVID levels and therefore still provide investors with a nice point of entry. This is especially true when compared to EM bonds of localised currencies as the U.S. dollar still can be considered more stable than the currencies of these smaller, emerging markets.