It’s been more than a decade since Argentina defaulted on its emerging market bonds, though many investors remain wary of this asset class. “EM debt accounts for 18% of total global debt, but accounts for a much smaller share of U.S. portfolios,” says Jim Barrineau, head of EM debt at Schroders.
“People think of it as a risky asset class, but that’s not necessarily the case. Default rates aren’t any higher than you’ll find on developed market high-yield bonds.” Yet Barrineau notes that the tide has begun to turn as paltry yields on developed market debt fuel growing demand for emerging debt.
Still, investors need to be cognizant of currency risk. As the dollar has staged a recent rebound, the portfolio manager has begun to shift the mix of bonds in the Hartford Schroders Emerging Markets Multi-Sector Bond Fund (SMSNX) toward dollar-denominated bonds. That fund, which carries a below-average 0.90% expense ratio, mostly targets an equal mix of local-currency debt, along with government debt and corporate debt that are priced in dollars and euros. That leads to lower volatility than what’s found in many other emerging market bond funds, says Barrineau.
Out on the Frontier
To be sure, Asia is also now home to a host of mature economies that are no longer in high-growth mode. Instead, a new wave of countries are now populating the ranks of global growth leaders.
“The growth dynamics in emerging markets are changing very rapidly,” says David Dali, portfolio strategist at Matthews Asia. His firm’s Matthews Emerging Asia Investor fund (MEASX), which holds five stars from Morningstar, has key holdings in nations such as Vietnam, the Philippines, Indonesia, Bangladesh and Sri Lanka.
Dali concedes that in the past, “investors had a tough time accessing these markets, due to a lack of liquidity.” But that’s changing fast. As an example, he notes that in 2005, Vietnam had less than 200 publicly traded firms. These days, that figure exceeds 1,200.
Like other strategists interviewed for this article, Dali is partial to domestically focused firms. “They are much better insulated from global macro concerns such as tariffs or currency risks.”
Bluer Skies Ahead
While emerging market stocks and bonds are often more volatile, they are benefiting from a backdrop of stronger GDP growth, which is fueling rising domestic consumption and productivity gains.