While emerging markets bonds had a bumpy ride in 2020, they did end the year in positive territory. With yields expected to remain near record lows across most developed markets, investors looking for better-than-average yield are likely to turn to emerging markets bonds, boosting investment in this segment in 2021.
On the whole, emerging market countries experienced less of a dip last year and are also recovering at a faster pace than developed countries. In the second half of 2020, all major emerging regions began to experience a sharp V-shaped recovery. Though the COVID-19 vaccine rollout may be gradual and potentially delayed, the approval of multiple vaccines should help to strengthen recovery and growth in these markets.
Significant monetary and fiscal stimulus has provided considerable support for global markets and this shows no signs of easing up. This could mean a weaker US dollar and substantial investments flowing into emerging markets.
In our view, the case for investing in emerging markets bonds is a powerful one for 2021 and beyond. This year we expect to see emerging markets recover strongly and have greater economic growth compared to developed markets. Global monetary policies, relatively attractive valuations and companies with solid fundamentals (profitability, revenue, assets, liabilities and growth potential) could all contribute to increased demand for emerging markets bonds.
Emerging markets local currency bonds in particular are increasingly providing investors with both attractive income and capital appreciation. Given their favourable valuations, the sensitivity to emerging market currencies and their historically larger yield premiums compared to treasuries, local currency bonds could bring considerably good returns in 2021.
Emerging markets local currency and local currency bond ETFs provide investors with instant diversification within this segment, containing dozens of assets from a wide variety of countries, including Mexico, Indonesia, China, Brazil and South Korea.