Emerging Market Bonds are a good buy
Investec says that emerging market bond funds currently represent a good buying opportunity despite potentially increasing high inflation.
Investec said that emerging market bonds have already priced in a significant amount of bad news, which gives them an effective buffer against inflation that has hit emerging markets hard. Also, central bank action to clamp down on the increasing inflation could see some success.
‘We think bond yields might be relatively close to the top. We have found many markets have anticipated the inflation that everyone is now talking about, and already priced in the risks,’ Investec’s emerging markets debt team said in a note.
Emerging markets bond yields in their local currency rates have risen to an average of around 8%-9%, which gives them significant protection against inflation well before results would turn negative. This is a function of their high starting yields in place even before the recent inflation scare.
The Investec note cites Turkey, where bond yields have hit 21%, but where the inflation rate is only 10.7%. And the inflation rate is attracting the attention of the central bank, which is intent on fighting it, as evidence of emerging market bonds overpricing of bad news.
Sussex-based Skerritt Consultants is also enthusiastic about emerging market bond funds, but they said they would be most suitable for investors with a slightly higher risk tolerance. They say the emerging market bond and exchange traded funds (ETF) should only be used as a part of your diversified portfolio, but they do say the yields and potential look “tasty”.