Economic growth in the emerging markets has picked up substantially, while that in the industrialised economies has been rather stable. This has led to an increase in the growth differential in the emerging markets’ favour. Investor demand for emerging markets bonds has been on the rise in search of higher yields and interest rates.
High liquidity, key-lending rates at zero percent in the Eurozone, and in some cases negative interest rates support the riskier bond segments. Corporate bonds from the emerging markets are particularly interesting by comparison.
Yield and volatility in comparison (data as of 30 September 2016) *)
Data as of per 30 September 2016; Source: ERSTE-SPARINVEST KAG
*) Note: the fund ratio “yield” is equal to the average yield of the securities held by the fund prior to the deduction of costs arising from hedging foreign exchange risks; please bear in mind that this yield ratio is not equivalent to the fund performance. The chart above does not take into account any costs that would diminish returns such as management fees or individual account management or deposit fees. In statistics, the term volatility denotes the propensity of a time series to fluctuate. In finance, it serves as measure for the risk of an investment. The risk of fluctuation rises along rising volatility.
European corporate bonds more attractive than government bonds
The segment of European government bonds is still not overly attractive. The historical volatility of these bonds is 4.0%, with an expected yield of currently only 0.5% priced in. By comparison, Eurozone corporate bonds are more attractive: expected yield amounts to 1.2%, at a clearly lower volatility than for euro government bonds.
Interest rate policy and US presidential elections driving the markets
The interest rate policy of the US Fed is a more crucial factor for market participants than the imminent US presidential election on 8 November, where according to polls Clinton is clearly ahead. The US Fed has already signalled it is prepared to raise interest rates. An increase in December is likely.
If the stock exchanges were to react negatively to the rate hike in December, this might create an interesting opportunity to invest in high-yield bond segment such as emerging markets corporate bonds.
