Macroscope | Why investors seeking refuge from inflation, policy tightening may look to emerging market bonds

Unlike bonds in the US and other advanced economies battling sky-high inflation, emerging market bonds can offer positive real income

Still, high food and energy prices mean investors must be selective; exporters of commodities are better-positioned than manufacturing countries reliant on goods from elsewhere

Reading Time:3 minutes

People walk past the Brasil Bolsa Balcao (B3) stock exchange in Sao Paulo, Brazil, on February 24. The Brazilian real has performed well over the past year as investors are drawn by low prices and high yields. Photo: Bloomberg

Published: 1:30pm, 25 Mar 2022

This year has already given investors a lot to contend with and we’re not even at the end of the first quarter. With rising rates, surging inflation and stratospheric increases in commodity prices, it may take some time before investors have more clarity on markets and the longer-term implications of the events of the past few weeks.

However, when the clouds do lift, some familiar themes are likely to re-emerge. One of the most persistent is: where can I find income?

The excessive levels of inflation and policy normalisation by developed market central banks create a challenge for anyone looking for positive real rates of income from core government bonds.

Investors will have to go further along the fixed-income risk spectrum in their search. Importantly, for positive inflation-adjusted yield, they may find themselves looking to emerging market bonds.

Economic shocks to the global economy and investors reducing their risk exposure would traditionally be a headwind for emerging market assets, as would rising US interest rates. A weaker growth outlook and falling demand from the developed world, especially the US, would weigh on emerging markets which are the world’s manufacturers.

However, the geopolitical tensions have lifted the price of nearly all commodities as supply concerns mount. This has created cross-currents for emerging economies that are both exporters of commodities and manufacturers that rely on them.

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