Return To A Once Beleaguered Emerging Market Asset Class

By now, plenty of investors know emerging markets stocks tumbled last year and are rebounding in 2019. The same is true of emerging markets bonds and the related exchange traded funds.

The iShares J.P. Morgan USD Emerging Markets Bond ETF EMB, the largest emerging markets bond ETF, is up 5 percent year-to-date and has nearly recouped all of last year's 5.5 percent loss.

What Happened

EMB and the broader emerging markets debt complex were plagued last year by multiple factors, some of which came about thank to U.S. monetary policy. Namely, rising U.S. Treasury yields triggered a dollar rally, which plagued dollar-denominated emerging markets bonds, including those held by EMB.

While emerging markets debt is rebounding this year, some market observers believe selloffs present buying opportunities.

“We would be buyers on any material sell-offs, as we see fundamentals remaining supportive in coming quarters,” said BlackRock in a recent note. “Our overall view on emerging markets (EMs) favors equities over debt, yet we believe EMD offers attractive income for bond portfolios.”

Why It's Important

Home to $17.43 billion in assets under management, it's clear EMB has a following. One reason for that is yield. The fund has a 30-day SEC yield of 5.34 percent compared with 3.02 percent on the Bloomberg Barclays US Aggregate Bond Index. Even with this year's rally, valuations on developing debt remain attractive.

“A reason EMD valuations still appear reasonable: The asset class took a hit last year as the Federal Reserve raised interest rates and the U.S. dollar (USD) appreciated. The backdrop for the asset class this year appears very different,” according to BlackRock.

That doesn't make EMB is a risk-free bet. Its largest geographic exposure, Mexico at a weight of almost 5.44 percent, could be downgraded due to struggles at state-controlled oil giant Pemex.

What's Next

“EMD valuations and income potential are relatively attractive, but the value case is less compelling than it was earlier this year,” said BlackRock. “A relatively stable USD outlook means no clear advantage in hard- over local-currency EMD.”

Over 85 percent of EMB's 467 holdings are rated BBB, BB or B.

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