Political Developments Prove Favorable For EM Bonds
July 24, 2024
Watch Time 4:55 MIN
Emerging Markets Bonds Update and Outlook, Q3 2024
I'm Eric Fine and I'm responsible for VanEck’s Emerging Market Fixed Income Strategies. So there were two key developments in the second quarter.
EM Bond Developments in Q2 2024
The first were there was a lot of politics. And the emerging markets saw South African elections, which ended up pretty much OK in a market -friendly direction, Indian elections, which also were elections of continuity, and Mexican elections, which looked unstable. But that was more about the heavy positioning in Mexico more than it was about bad policy. You also had developed market elections.
You had elections in France and in France they coincided with the German finance minister questioning whether the central bank, the ECB, can buy French bonds to support any volatility. That's a profound risk. Very different from the political developments that I mentioned. You have the US where there are regular financial media questions on the independence of the Fed. Again, a profound policy and political discussion that's not happening in these emerging markets. Similarly, you have Japan, though it didn't face any big political events, continuing to see its currency and bond markets weaken. These are developed markets going through serious political and policy risks that are arguably unpriced. And I think this is a real solid juxtaposition against the EMs that saw noise that was largely unwarranted.
The second big development after politics in the second quarter was that US rates rallied. There had been a concern that especially long-dated bonds, 10 years and 30 years, were going to sell off and that the rate cuts that the market had been pricing in would continue to get priced out. That didn't happen in the second quarter. And that generated fairly OK returns for some bond categories.
However, the decline in yields was generated much more by concerns on growth in jobs than it was in the decline in inflation. So it does hold the power to bring yields down. But if inflation doesn't cooperate, a few months from now, it could create further risks.
Those are the two key developments. A lot of politics, which I think made EM look okay despite the noise. mean, DM look much more worrisome. And the other big event was the decline in yields, especially duration in treasuries.
The Impact to Investors in the Short-term and Longer Term
So what do these developments in the second quarter mean? What do they mean for investors in the short term and the long term?
Number one, our mantra has been, and we've been quoting Mark Twain on this, “it ain't what you don't know that's going to get you,” right? It's not these risks that seem high that's going to get you. “It's what you know for sure that just ain't so.” It's the mass of investment that's in developed market bonds that's probably more worth worrying about. So I think that's the biggest takeaway.
I'll give you the examples. In South Africa, despite the noise, you have an alliance between the ANC and the very market-friendly DA. This is a really good outcome, and South Africa is one of the only currencies in the world that's strong against the dollar this year. We had an overweight, and we stayed overweight. Didn't do anything. That one's working, and the outcome was good despite a couple days of noise.
Mexico, we went in extremely underweight. The market blew up because it was very heavy, and it got surprised by the election outcome, a better than expected outcome for the prior and new incoming government that raised issues of what are they going to do with this power policy-wise? Well, they've since come out with a very orthodox finance ministry appointment and number of comments that they're going to maintain fiscal orthodoxy. To the extent that there are risks in Mexico, we don't see them out of fiscal, which means it's very hard for us to map these to adverse outcomes for the Mexico peso or for Mexican rates. What did we do about it? We bought more. We had a big underweight. Market was too heavy. It blew up, adjusted by over 10%. And we bought more.
So those, I think, are the particular meanings is that these sell -offs create opportunities in EM to essentially buy. I'll give you the bottom line so far of how this is represented. In other words, I said the implications are it's good for EM and bad for DM. Let's look at what's actually happened year to date. Year to date, our fund is up 55 basis points. Our benchmark's down 72, and the global Agg is down 3%. Treasuries are down 2%. So year to date, yet again, EM is doing much better than DM, and our fund is outperforming. And this has been going on for five to 20 years. We've shown the papers on that. So think we're seeing a lot of developments that are very consistent with EM outperforming DM. The risks are much more in DM. They're not priced. The risks in EM are arguably overpriced.
IMPORTANT DISCLOSURE
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
You can lose money by investing in the VanEck Emerging Market Bond Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. The Fund is subject to risks which may include, but are not limited to, risks associated with active management, credit, credit-linked notes, currency management strategies, derivatives, emerging market issuers, energy sector, ESG investing strategy, foreign currency, foreign securities, hedging, high portfolio turnover, high yield securities, interest rate, LIBOR replacement, market, non-diversified, operational, restricted securities, investing in other funds, sovereign bond, and special risk considerations of investing in Latin American issuers, all of which may adversely affect the Fund. Emerging market issuers and foreign securities may be subject to securities markets, political and economic, investment and repatriation restrictions, different rules and regulations, less publicly available financial information, foreign currency and exchange rates, operational and settlement, and corporate and securities laws risks. Derivatives may involve certain costs and risks such as liquidity, interest rate, and the risk that a position could not be closed when most advantageous.
The Fund’s benchmark index (50% GBI-EM/50% EMBI) is a blended index consisting of 50% J.P. Morgan Government Bond Index-Emerging Markets (GBIEM) Global Diversified and 50% J.P. Morgan Emerging Markets Bond Index (EMBI). The J.P. Morgan GBI-EM Global Diversified tracks local currency bonds issued by Emerging Markets governments. The J.P. Morgan EMBI Global Diversified tracks returns for actively traded external debt instruments in emerging markets, and is also J.P. Morgan’s most liquid U.S. dollar emerging markets debt benchmark.
Average Annual Total Returns* (%) (In USD)
| Month End as of June 30, 2024 | |||||||
| 1 MO | 3 MO | YTD | 1 YR | 3 YR | 5 YR | 10 YR | |
| Class A: NAV (Inception 07/09/12) | 0.26 | 0.52 | 0.22 | 4.94 | -0.76 | 2.28 | 0.88 |
| Class A: Maximum 5.75% load | -5.51 | -5.26 | -5.54 | -1.10 | -2.70 | 1.08 | 0.29 |
| Class I: NAV (Inception 07/09/12) | 0.43 | 0.58 | 0.55 | 5.26 | -0.40 | 2.60 | 1.21 |
| Class Y: NAV (Inception 07/09/12) | 0.19 | 0.45 | 0.40 | 5.03 | -0.51 | 2.51 | 1.12 |
| 50% GBI-EM/50% EMBI | -0.23 | -0.66 | -0.72 | 4.91 | -2.88 | -0.61 | 0.91 |
* Returns less than one year are not annualized.
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