As the U.S. continues to teeter on the so-called “fiscal cliff,” emerging market (EM) fixed income investors may be concerned about what this will mean for their bond holdings. Should the U.S. fail to resolve its budget issues, the impact of the impasse will certainly be felt, but may not be as severe as some expect, according to Fran Rodilosso, fixed income portfolio manager at Market Vectors ETFs.
“EM local currency bonds are becoming more strategic, as opposed to purely tactical, allocation for many investors. We believe the market is supported by, in addition to the underlying fundamentals, improved liquidity, expanded yield curves, and a greater opportunity to diversify,” says Rodilosso. “In other words, the money that has flowed in this year might not be as ‘hot’ as in previous years.”
Rodilosso cautions that while the situation has improved, not all the “hot money” has vanished from the market. “We witnessed underperformance on EM local debt in 2011, due in part to outflows on a flight-to-quality trade, so that type of hot money is indeed still there,” he says. “But the progression towards more permanent allocations and, ultimately, lower volatility still appear to be in place.”
Should the U.S. fiscal cliff talks fail, Rodilosso expects that the initial reaction of emerging market local currency bonds will be negative, as investors pull back from “risky” assets. More broadly, a significant drop in U.S. growth would likely dent most EM country fundamentals, as well. At the same time, however, the relative strength of the emerging economies and the relative health of their balance sheets should remain intact as the year draws to a close.
“Looking past the current drama with the fiscal cliff, we see the appetite among institutional investors growing for EM local currency bonds in general, with many looking for a diversified basket of securities,” says Rodilosso. “Lately, we are also seeing more interest in the ‘dim sum’ bond market – where investors can gain more yuan exposure, typically through investments in investment grade corporate borrowers from within and without China,” the Market Vectors fixed income portfolio manager added.
“In the first three quarters of 2012, we saw waning interest in this asset class, but companies are still looking to issue in the yuan market, even at higher rates. The consensus seems to be forming that further yuan appreciation over the medium term can amplify higher rates that most of these entities will pay via U.S. dollar- or Euro-denominated issues.”
Mr. Rodilosso has 20 years of experience trading and managing risk in fixed income investment strategies, including 17 years covering emerging markets. Among the Market Vectors ETFs under his watch are LatAm Aggregate Bond ETF (NYSE Arca: BONO), Emerging Markets Local Currency Bond ETF (NYSE Arca: EMLC), Emerging Markets High Yield Bond ETF (NYSE Arca: HYEM), International High Yield Bond ETF (NYSE Arca: IHY), Renminbi Bond ETF (NYSE Arca: CHLC), Fallen Angel High Yield Bond ETF (NYSE Arca: ANGL) and Investment Grade Floating Rate ETF (NYSE Arca: FLTR). As of November 30, 2012, the total assets for these ETFs amounted to approximately $1.4 billion.
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Please note that the information herein represents the opinion of the author and these opinions may change at any time and from time to time. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Non-Van Eck Global proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
About Market Vectors ETFs
Market Vectors exchange-traded products have been offered since 2006 and span many asset classes, including equities, fixed income (municipal and international bonds) and currency markets. The Market Vectors family totals $27.9 billion in assets under management, making it the fifth largest ETP family in the U.S. and eighth largest worldwide as of September 30, 2012.
Market Vectors ETFs are sponsored by Van Eck Global. Founded in 1955, Van Eck Global was among the first U.S. money managers helping investors achieve greater diversification through global investing. Today, the firm continues this tradition by offering innovative, actively managed investment choices in hard assets, emerging markets, precious metals including gold, and other alternative asset classes. Van Eck Global has offices around the world and manages approximately $37.8 billion in investor assets as of September 30, 2012.
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