Emerging market (EM) bonds will remain an attractive asset class in spite of a potential hike in interest rates by the US Federal Reserve. The Excel High Income Fund is well-positioned in local and hard currency EM bonds, credit and foreign exchange investments to generate the best possible risk-adjusted returns in the event of changes in market conditions.
Why are EM bonds attractive?
EM bonds are attractive for multiple reasons. Among these reasons are:
- They offer a significant yield pick-up versus traditional developed market asset classes
- They are especially relevant in the current low yield developed market (DM) environment, offering two to three times the yield of DM instruments such as US Treasuries and German Bunds
- They offer currency diversification in terms of hard (for example US$ and Euro) and local currencies
- They offer broad diversification across more than 60 countries and over 540 corporate issuers
Where is current value now?
There is more value currently in EM credit, that is, bonds denominated in US$ and Euros. That is because there is an absence of currency risk embedded in these bonds. They also offer significantly higher yields and spreads over US Treasuries and German Bunds, for example.
While local currency bonds and foreign exchange have significant future value, now is not necessarily the right time to invest in these areas. Market reaction to the Greek situation and consequent developments in the Eurozone, combined with the potential hike in US interest rates weigh on the outlook for local currency bonds and foreign exchange.
Is it the right time to invest in EM bonds?
Now is the right time to invest in EM credit which can offer double to triple the yield of DM asset classes.
What will be the impact of an increase in US rates?
A much anticipated rise in US interest rates which is not expected to occur until about the fourth quarter will not have the same impact at it did during the 2013 taper tantrum because investors are aware of the upcoming hike and are better prepared for it. In addition, their exposure to EM bonds is not as high as it was in 2013 and levels of trading in terms of valuation are not as tight as they were in 2013.
Why the Excel High Income Fund?
The Excel High Income Fund has exposure to all aspects of EM debt, including credit, local and hard currency bonds and foreign exchange. The Portfolio Manager, Amundi Asset Management, can move quickly to allocate assets based on changes in market conditions to achieve the best risk-adjusted returns.