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The Evolution of Emerging Markets Bonds


EM Bond Universe


FRAN RODILOSSO: I have no argument with the notion that more debt is not a good thing. On the other hand, from an investor's point of view, having a broad universe of bonds from which to choose can have its advantages. In the case of emerging markets today, investors have a broad and deep market from which to select. Investors have a wide array of choices among sovereign debt in hard-currency and local-currency and also corporate debt in hard-currency. Local debt and corporate debt were a very small part of the emerging markets debt universe ten years ago. That universe overall has increased nearly fivefold over the last decade, yet the hard-currency sovereign debt has only about doubled in size. The vast majority of growth has happened in the local currency space and in the corporate space. Overall, the emerging market debt universe is nearly $3 trillion in size, in terms of investable assets. At the same time the emerging markets debt universe has grown in size, it has also become highly diversified. The Market Vectors EM Aggregate Bond Index (MVEMAG), in fact, is represented by more than 60 countries, 20 currencies, and nearly 600 corporate issuers. Of those 600 corporate issuers, approximately 70% are investment-grade.


Economic Fundamentals


RODILOSSO: Although the emerging markets debt universe has grown significantly over the past decade, there are some interesting fundamental aspects that you should keep in mind. First, sovereign issuers are actually on average less indebted than they were a decade ago, at least in terms of percentage of gross domestic product. By virtue of issuing more in their own currencies, however, emerging markets issuers are also less exposed to currency volatility and the effects it can have on their solvency. Corporate issuers have benefited possibly the most. They are no longer crowded out by excessive sovereign issuance, particularly in the hard-currency markets. By virtue of the private sector having greater access to international capital markets, there has been better growth in emerging markets.


 

Emerging Markets Bonds Characteristics


RODILOSSO: There is no doubt that the opportunities presented in the emerging markets debt universe also come with many risks. In the corporate sector investors are exposed to greater idiosyncratic risk at the issuer level, and sovereign risks are still certainly in existence as they impact corporate borrowers as well. In exchange for that, however, investors are generally compensated more for investing in corporate debt than they are in emerging markets sovereign debt. They also generally earn higher spreads than they do for developed market corporate issuers with similar credit profiles.


The hard-currency sovereign portion of the universe has had longer duration than the other two parts of the emerging markets debt world. That implies higher interest rate risk. Of course the risk of sovereign default remains present, although more than 65% of this universe is rated investment-grade. Local currency sovereign debt, in as much as sovereign issuers have the ability to print their own currencies, generally carries less default risk than hard-currency sovereign debt. On the other hand, currency volatility plays a very large role in returns. In fact, in recent years it has been the main driver of returns in the local currency sovereign sector.


Emerging Markets Debt

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IMPORTANT DISCLOSURE


The views and opinions expressed are those of the speaker and are current as of the video’s posting date. Video commentaries are general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions. All performance information is historical and is not a guarantee of future results. For more information about Van Eck Funds, Market Vectors ETFs or fund performance, visit vaneck.com. Any discussion of specific securities mentioned in the video commentaries is neither an offer to sell nor a solicitation to buy these securities. Fund holdings will vary. All indices mentioned are measures of common market sectors and performance. It is not possible to invest directly in an index. Information on holdings, performance and indices can be found at vaneck.com

Please note that Van Eck Securities Corporation offers investment products that invest in the asset class(es) included in this video. Debt securities carry interest rate and credit risk. Bonds and bond funds will decrease in value as interest rates rise. 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. Securities may be subject to call risk, which may result in having to reinvest the proceeds at lower interest rates, resulting in a decline in income. International investing involves additional risks which include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability. Changes in currency exchange rates may negatively impact the Fund’s return. Investments in emerging markets securities are subject to elevated risks which include, among others, expropriation, confiscatory taxation, issues with repatriation of investment income, limitations of foreign ownership, political instability, armed conflict and social instability.


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