Fran Rodilosso, Head of Fixed Income ETF Portfolio Management, CFA
November 29, 2019
High yield emerging markets corporate bonds have had a solid year so far, against a backdrop of stable credit fundamentals and low default rates. Breaking down the sources of year-to-date returns, we believe that, in an environment of continued global growth and accommodative monetary policy, the asset class may continue to perform well as we look ahead to 2020.
Top contributors to performance of the ICE BofAML Diversified High Yield US Emerging Markets Corporate Plus Index this year, in terms of country of issuer, include many of the countries with the highest weightings. With positive fundamentals in Russia and the prospect of structural reforms in Brazil, these countries are, not surprisingly, among the top contributors this year. Perhaps more surprising is that China, Turkey and South Africa are also outperforming, given the various domestic and geopolitical issues impacting those countries.
What explains the outperformance of the issuers from these countries? In some cases, such as China and Turkey, it reflects a recovery following last year’s underperformance. Tighter credit spreads among Chinese, Turkish, Brazilian, Russian and South African companies have contributed significantly to performance, but spread movements on the index overall have had a neutral return impact. Carry, with yields in excess of 7%, explains the majority of this year’s returns overall, followed by duration given the decline in U.S. interest rates over the year.1 The nearly 150 basis point spread pickup by the asset class above U.S. high yield, as represented by ICE BofAML US High Yield Index, suggests that emerging markets high yield bonds could benefit from upside growth scenarios in China, and globally, in 2020.2
Total Return Breakdown of Top Contributors by Country of Risk (1/1/2019 to 10/31/2019)
Source: FactSet as of 10/31/2019.
Finally, the differences between equity and high yield returns within countries is significant in many cases. For example, Turkish high yield corporates have returned nearly 15% this year, compared to equity returns of less than 2%. South African high yield has returned approximately 13%, versus nearly flat equity returns. In contrast, Russian high yield bonds have returned approximately 12%, significantly lagging equities.3 These differences underscore the diversification benefits that emerging markets high yield corporate bonds can provide within a broader emerging markets portfolio.
1Source: ICE Data Indices. Data as of 10/31/2019
2Source: ICE Data Indices. Data as of 10/31/2019
3Source: FactSet and Morningstar, as of 10/31/2019
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ICE BofAML US High Yield Index: comprises below-investment grade corporate bonds (based on an average of Moody’s, S&P and Fitch) denominated in U.S. dollars. The country of risk of qualifying issuers must be an FX-G10 member, a Western European nation, or a territory of the U.S. or a Western European nation.
ICE BofAML Diversified High Yield US Emerging Markets Corporate Plus Index: comprises U.S. dollar bonds issued by non-sovereign EM issuers that are rated below investment grade.
Index returns are not Fund returns and do not reflect any management fees or brokerage expenses. Certain indices may take into account withholding taxes. 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. Index returns assume that dividends have been reinvested.
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