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Much has been made in recent days of the decision by Moody’s to elevate Turkey to investment grade status, but that country’s success is less a standalone story and much more an indicator of a larger trend impacting emerging markets (EM), said Fran Rodilosso, Fixed Income Portfolio Manager at Market Vectors ETFs.
“Over the last decade, the majority of sovereign EM debt issuers have significantly reduced their debt as a percentage of GDP,” said Rodilosso. “The major rating agencies have taken notice, and approximately 90 percent* of the issuers in the J.P. Morgan GBI-EMG Core Index, which our Market Vectors Emerging Markets Local Currency Bond ETF (EMLC) tracks, are now investment grade.” That ratio is up approximately by 10 percent from the index’s inception in July 2010.
“This stands in sharp contrast with the trends that have shaped the developing world over the past decade,” continued Rodilosso. “Debt-to-GDP ratios** in developed nations have exploded upwards to the point where developed sovereign issuers are projected to have more than three times the debt burden of their EM counterparts.”
Rodilosso pointed out that while EM sovereign issuers have been paring their debt ratios, a majority have also increasingly moved to issuing debt in their own currencies, rather than in hard currencies. “For fixed income investors, this makes it important to consider adding exposure to emerging markets local currency sovereign debt,” he said.
Rodilosso went on to add that investing in this type of debt is not without risks. “There are essentially three main types of risk in EM sovereign debt,” he said, “credit risk, interest rate risk, and currency risk. The credit risk story among these nations has, on the whole, seen dramatic improvement in recent years, in my view. Emerging markets central banks have not been pursuing the types of stimulus measures we have seen undertaken in the U.S. and Japan, leaving them with more flexibility to manage interest rates up or down as they see fit and at least somewhat mitigating interest rate risk concerns.”
“Currency risk does remain a real concern though,” he continued. “However, the relative independence of emerging markets central banks, less repressive interest rate policies, lower sovereign debt levels, and greater potential for growth all continue to support many emerging markets currencies.”
Rodilosso also added that since these risks, as well as political risks in many of these countries, remain real, investors would be well served to consider adding diversified exposure to emerging markets local currency debt as a means of mitigating risk and avoiding overexposure to a single EM nation.
Mr. Rodilosso has 20 years of experience trading and managing risk in fixed income investment strategies, including 17 years covering emerging markets. Among the Market Vectors ETFs under his watch are Emerging Markets Local Currency Bond ETF (NYSE Arca: EMLC), Treasury-Hedged High Yield Bond ETF (NYSE Arca: THHY), Emerging Markets High Yield Bond ETF (NYSE Arca: HYEM), Fallen Angel High Yield Bond ETF (NYSE Arca: ANGL), International High Yield Bond ETF (NYSE Arca: IHY), Investment Grade Floating Rate ETF (NYSE Arca: FLTR), LatAm Aggregate Bond ETF (NYSE Arca: BONO) and Renminbi Bond ETF (NYSE Arca: CHLC). As of March 31, 2013, the total assets for these ETFs amounted to approximately $1.9 billion.
Van Eck Associates Corporation does not provide tax, legal or accounting advice. Investors should discuss their individual circumstances with appropriate professionals before making any decisions.
Please note that the information herein represents the opinion of the portfolio manager and these opinions may change at any time and from time to time. This is not a recommendation to buy or sell any security nor is it intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Non-Van Eck Global proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
*Source: FactSet; S&P, as of May 2013
**Source: IMF World Economic Outlook, general government gross debt to gross domestic product, as of April 2013
Gross domestic product (GDP) - The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.
Index returns assume the reinvestment of all income and do not reflect any management fees or brokerage expenses associated with Fund returns. Investors cannot invest directly in the Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses.
The J.P. Morgan GBI-EMG Core Index is designed to track the performance of bonds issued by emerging market governments and denominated in the local currency of the issuer. The Index is designed to be investible and includes only those countries that are accessible by most of the international investor base. The Index Provider selects bonds from each of the emerging market countries set forth below that are fixed-rate, domestic currency government bonds with greater than 13 months to maturity. As of June 30, 2012, the Index included 172 bonds of issuers from the following countries: Brazil, Chile, Colombia, Hungary, Indonesia, Malaysia, Mexico, Peru, Philippines, Poland, Russia, South Africa, Thailand and Turkey.
About Market Vectors ETFs
Market Vectors exchange-traded products have been offered since 2006 and span many asset classes, including equities, fixed income (municipal and international bonds) and currency markets. The Market Vectors family totaled $26.1 billion in assets under management, making it the fifth largest ETP family in the U.S. and ninth largest worldwide as of March 31, 2013.
Market Vectors ETFs are sponsored by Van Eck Global. Founded in 1955, Van Eck Global was among the first U.S. money managers helping investors achieve greater diversification through global investing. Today, the firm continues this tradition by offering innovative, actively managed investment choices in hard assets, emerging markets, precious metals including gold, and other alternative asset classes. Van Eck Global has offices around the world and managed approximately $35 billion in investor assets as of March 31, 2013.
There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. Debt securities carry interest rate and credit risk. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. Credit risk is the risk of loss on an investment due to the deterioration of an issuer's financial health. The Funds' underlying securities may be subject to call risk, which may result in the Funds having to reinvest the proceeds at lower interest rates, resulting in a decline in the Funds' income.
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