BlackRock fund manager sees this as the market’s ‘sweet spot’
With almost daily political drama in the U.S. and the prospect of easy-money policies soon coming to an end, traders could be forgiven for struggling to figure out where to invest next.
But BlackRock, which manages $6 trillion in investor money, says there is still a “sweet spot” left in the market that tunes out the noise of both U.S. politics and central bank tightening: Emerging markets bonds.
“Whatever happened earlier this year, it didn’t have that much of an impact. Normally we see emerging markets at the center of the turmoil or there is extra volatility—because they are emerging markets—but actually we saw resiliency,” said Sergio Paz, head of emerging-markets, fixed income at BlackRock.
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Indeed, as this chart shows, EM bonds, as measured by the iShares JP Morgan EM Local Government Bond ETF IEML, -0.38% hardly flinched during the market turmoil in early February. In comparison, the S&P 500 SPX, -0.16% and Dow Jones Industrial Average DJIA, -0.47% suffered their worst week since 2008 on fears rising inflation would lead to more aggressive rate increases in the U.S.
“To us emerging markets is a very, very interesting asset class. We are invested in them both through iShares and through [idiosyncratic funds]. They yield around 5% plus the diversification they offer is very attractive,” said Scott Thiel, head of global bonds, said.
The BlackRock strategists pointed to four reasons why emerging markets bonds are a great bet going forward and why they were resilient during the selloff in February.
- Monetary policy in local markets is very attractive for bond investors, Paz explained. That’s partly because you have diversification across a wide range of countries with different levels of inflation and partly because the EM central banks typically have plenty of room to lower interest rates. If rates go down, yields on local bonds usually follow, which means prices go up. Yields and prices always move inverse.
- Economic growth across developing economies is much stronger than during the infamous taper tantrum of 2013, which sent emerging-market assets into a tailspin. The exodus from EM at that time was largely due to huge sums of money pumped into the financial system via the Federal Reserve’s quantitative-easing program, which worked its way into emerging-markets assets. When it looked like the Fed would remove those easy-money initiatives, investors freaked because they realized the EM economies weren’t strong enough to stand alone.However, that has changed now, according to Paz..“That means you go there, but you are not buying the Fragile 5, fiscal deficits or whatever in trying to go for an asset using QE. You are buying emerging markets because of the [solid] dynamics of those countries,” he said.
- The political risks are much lower across those regions than they’ve been for years. Concerns over the North American Free Trade Agreement, or Nafta, political shifts in South Africa, and Russian sanctions have all been priced into the market, so there is little to worry about overall, Paz said. He did, however, warn that coming elections in Brazil and Mexico could spark some volatility.
- Institutional investors are getting excited about EM. Using the taper tantrum as an example again Paz said investors had used the emerging-market assets from a tactical perspective and not because they fundamentally believed in the space. But that has changed now, and institutional clients are using EM assets as a building block for their portfolios, which make the bonds a more stable place to invest than previously, he added.
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