Pacific Investment Management Company (PIMCO) is out with a very compelling call on emerging market corporate bonds. The rationale goes that, since the economic crisis in the developed world four years ago, the fiscal and economic strength of emerging markets is looking extremely attractive to big money managers.The problem is that, due to record low rates around the globe and increased demand, bonds issued by emerging market governments are not yielding as much as they have historically. Further, because of their new relative strength compared with developed nations, more emerging market governments are issuing debt in local currencies. Money managers typically favor dollar-denominated debt for its security against inflation and devaluations in emerging markets.
Enter emerging market dollar-denominated corporate debt
As late as 2000, emerging market sovereign debt made up approximately 80% of total issuance. Since 2003, emerging market corporations have issued the majority of debt and the forecast for 2012 is for more than 75% of total issuance to come from corporates. The absolute dollar amount of sovereign issue has remained fairly constant between $40 and $80 billion each year.
PIMCO suggests emerging market corporate debt as both a strategic and tactical move for investors. Holding emerging market debt over the long term will increase overall yield and the debt denominated in local currencies may help to guard against long-term depreciation in the dollar. Because corporate debt tends to be of shorter duration, it can be a good tactical decision as well. Record low rates must increase eventually and when they do, bond prices will come down. Shorter-term debt will not decrease in price as quickly as longer durations.
PIMCO especially likes issues of quasi-sovereigns, that is corporations owned largely by the state, for their higher yield and safety relative to sovereigns.
The iShares JP Morgan USD Emerging Markets Bond (EMB) holds 141 bonds almost exclusively in sovereign debt with an average duration of 12 years. Total return over the last year was 19.9% with 4.06% dividend yield and an expense fee of 0.6%.
Other choices for emerging market sovereign debt include the PowerShares Emerging Markets Sovereign Debt (PCY), which is dollar-denominated debt, and the WisdomTree Emerging Markets Local Debt (ELD), which is local-currency debt.
I highlighted the WisdomTree Emerging Markets Corporate Fund (EMCB) in an article last May as part of a diversified income strategy. The fund is up 9.5% since its launch in May and pays investors a 4.3% dividend yield. The fund is fairly diversified with exposure to corporate debt in Latin America (51.5%), Asia (23.9%) and EMEA (24.6%) and sector exposure in energy (35.7%), industrials (19.8%), metals (19.6%) and telecom (12.6%).
Full Disclosure: Author owns shares of PCY and EMCB