Vanguard is among several asset managers who have recently warmed to emerging market opportunities.
Jonathan Lemco, senior investment strategist of Vanguard Investment Strategy Group, said in a recent note that the bonds of fiscally well-managed developing countries have relatively attractive yields, while countries with fiscal and political difficulties, like junk-rated Brazil, offer higher yields to compensate investors for the risk they are bearing.
“On balance, we’ve seen a major improvement in emerging markets. It’s a risk-reward balance,” he said.
Lemco believes that most emerging-market countries now have lower sovereign debt-to-GDP ratios than during the 1990s. The countries that have increased their external debt loads have been able to do so through deepening domestic financial markets and better access to private sector funding.
He said Mexico is a good example of a country that has seen enormous progress. “Mexico is an investor darling right now. Pemex, the former national oil company, comes to the market fairly regularly and tends to be attractively priced. Mexico sovereign bonds are liquid, and the country is now politically and fiscally well-managed. Economic growth will be okay because it’s tied to the US.”
Emerging markets fell into investor disfavor in the late 1990s and early 2000s, when appreciation in the US dollar and falling commodity prices provided the backdrop for financial crises in several countries, and those crises forced many countries to break their hard currency pegs to the dollar, he said.
While some investors worry that the potential for currency devaluation and slowing economic growth in some countries, such as China, do not bode well for emerging markets, he is taking a long term positive view sees based on favourable demographic and economic trends.
Some analysts focus on the BRICS — Brazil, Russia, India, China and South Africa — and believe that there are some concerns for the emerging markets. But Lemco said the focus never made much sense as a category that looks at the broader developing world.
Although the BRICS joined world policy-making bodies and the countries opened a development bank in 2015, the five have never had much in common, he said.
“Beyond the fact that they’re enormous and important, there’s nothing that should cause you to believe they’re in any way united. We probably never should have considered them more than an acronym, since there’s not much utility tying them together.”
