Back in May I wrote about “A Green Light on Emerging Market Bonds.” The green light is still on. If anything it’s brighter.
In the past, the debt of emerging economies has spelled risk. The Asian financial crisis of 1997 and the collapse of the Russian ruble in 1998 were stinging reminders of the dangers of investing in developing countries.
But today emerging market bonds are behaving like a safe haven investment.
Emerging market bond funds saw inflows of $1.7 billion last month (according to Lipper), more than any other fixed income fund category. And so far this year inflows have amounted to something like $11.4 billion…a 20% increase over last year.
Of course there are always risks inherent to investing in developing economies, like political instability and currency fluctuation. But if there is a shift in the perception of emerging market debt, there is a good reason. Developing countries have cut their government debt to 34% of economic growth, according to the International Monetary Fund. At the same time the government debt of advanced nations has risen to 103% of growth…from 73% in 2000. And while developed countries will expand 2.2% this year, emerging markets will grow 6.6%.
Granted, there are no AAA rated emerging market countries, but many advanced countries shouldn’t talk. With cleaner balance sheets, healthier growth prospects and higher yields, it’s not a surprise that developing economies are attracting investors.
A proxy for emerging market debt, iShares JP Morgan USD Emerging Markets Bond Fund (NYSEARCA:EMB), is in a well established positive trend, and is a long-term buy. And the fund has performed well based on relative strength within a diversified portfolio of multiple asset classes.
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I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.