Emerging economies have suffered in recent years but have now entered a phase of greater long-term stability, and their bonds are already pricing in the main risk factors.
We can expect developed-country bond yields to continue falling. Renewed economic and political uncertainty is prompting the main central banks to keep rates under pressure. In the eurozone, the ECB is maintaining high levels of liquidity through its asset purchase programme, which is continuing to push down bond yields to the extent that the sovereign German 10-year yields are now negative. Similarly, the current level of US Treasury yields no longer reflects the country's economic situation, which is now showing a degree of inflation and fairly consistent growth.
"Dwindling yields in developed markets mean that alternatives are needed more than ever. Given today's circumstances, investment flows are starting to shift back to emerging-market debt, which is becoming more attractive after several quarters of uncertainty," according to Denis Girault, Head of Emerging Markets Fixed Income at UBP. From the macroeconomic point of view, emerging markets have entered a phase of greater long-term stability, with many countries balancing their current accounts in the last few months. Another positive factor is that commodity prices have stabilised. "These trends are helpful for emerging bond markets. Although the asset class has already rallied in the last few months, we still see scope for spreads to narrow, and therefore for prices to rise," he adds.
Selective investment approach
Although risk has recently shifted towards Europe, there are still some concerns regarding emerging markets. The main risk relates to weak solvency levels in the Chinese banking sector. "Unexpected newsflow from China could cause stress in the market. However, we believe that most of the risks have already been identified and priced into emerging-market bonds." Investment managers can mitigate risk in several ways, such as diversifying positions globally and taking a selective investment approach. UBP's team uses an active, unconstrained "bond-picking" strategy. "We analyse and select securities, issuer by issuer, based on their fundamentals and valuation," says Denis Girault.
Head of Fixed Income