After a year of largely negative returns, fixed income asset classes appear to already be facing significant headwinds in 2014.
But according to Fran Rodilosso, fixed income portfolio manager with Market Vectors ETFs, some high yield-oriented asset classes, and selected emerging market (EM) debt in particular, may be getting unduly punished.
“Emerging markets are suffering from a variety of afflictions at the moment,” says Rodilosso. “The concern remains that Fed tapering may pull more investment dollars away from both emerging markets debt and equity. This has been compounded by negative news and/or economic data from Turkey, South Africa, Argentina, Ukraine and, most importantly, China.
“The trend of capital flows away from emerging markets generally has a self-fulfilling, negative effect. Several of the countries being most impacted by the current sell-off are suffering political as well as economic stress. But we believe there is still a far more solid underpinning to most emerging economies, and to their government balance sheets, than there has been in previous periods of stress.”
In some cases, adds Rodilosso, domestic capital markets in EM nations are more mature than they were in previous crises, and while emerging markets debt asset classes may see additional outflows in the coming months, the long-term trend of higher institutional allocations to various types of EM debt appears to be intact.
Rodilosso says EM high yield corporates (denominated in US dollars) ended 2013 with a spread of more than 200 bps versus US high yield corporates, some 175 bps wider than where they were at the start of the year. The spread in EM investment grade corporates was more than 60 bps at year-end, with EM investment grade corporates’ effective duration being more than 100 bps lower than US investment grade corporates.
“EM debt has experienced a relative pick-up in spreads over the last nine months and I believe there are pockets of value still to be found around the globe. I have no doubt that timing will play a factor, but it is not too early to start looking,” Rodilosso says.
