Emerging Markets Debt: A Diversification Play
By Fran Rodilosso, CFA, Head of Fixed Income ETF Portfolio Management, VanEck
We believe one of the most attractive features of emerging markets debt, from a portfolio construction perspective, is the diversification potential it can provide. Within emerging markets debt, local currency bonds have historically provided the greatest diversification benefit compared to U.S. dollar-denominated emerging markets sovereign or corporate bonds, as measured by the segment’s relatively low correlation to other asset classes.
Emerging Markets Local Currency Bonds Exhibit the Lowest Correlation (10/2014 - 9/2019)
Source: Morningstar as of 30/9/2019. US Aggregate is represented by the Bloomberg Barclays U.S. Aggregate Bond Index; US IG Corporate is represented by the ICE BofAML US Corporate Index; US HY Corporate is represented by the ICE BofAML US High Yield Index; US Equity is represented by the S&P 500; Local Currency EM Sovereign Bonds is represented by the J.P. Morgan GBI-EM Global Core Index; USD EM Sovereign Bonds is represented by the J.P. Morgan EMBI Global Diversified Index; USD EM Corporate Bonds is represented by the J.P. Morgan CEMBI Broad Diversified Index.
This diversification advantage is driven by the two distinct sources of return that local currency bonds provide: return potential from foreign currency, as well as local interest rates that increasingly tend to be influenced primarily by local conditions rather than developed markets central banks. The fourth quarter of 2018 provides a recent example of how emerging markets debt may help offset weakness experienced in other asset classes. As growth concerns mounted, credit spreads widened significantly and equity markets dropped. With market expectations for further cuts to U.S. interest rates and potentially less support for the U.S. dollar, we believe the return potential of emerging markets local currencies may provide a boost to portfolio returns.
MVEMAG vs. MVEMCL vs. MVEMCD
vs. MVEMSL vs. MVEMSD
Source: MV Index Solutions.
About the Author:
Fran Rodilosso, CFA (MBA – with distinction, Finance, The Wharton School, University of Pennsylvania; BA, History, Princeton University, 1990). Mr. Rodilosso serves as Head of Fixed Income ETF Portfolio Management for VanEck Vectors® Fixed Income ETFs. Mr. Rodilosso oversees the Fixed Income ETF team and is responsible for portfolio strategies, as well as credit and market analysis; specializes in international bond markets.
The article above is an opinion of the author and does not necessarily reflect the opinion of MV Index Solutions or its affiliates.