A Picture Is Worth a Thousand Words

The VanEck Emerging Markets Bond Fund utilizes a flexible approach to emerging markets debt investing and invests in debt securities issued by governments, quasi-government entities or corporations in emerging markets countries. These securities may be denominated in any currency, including those of emerging markets. By investing in emerging markets debt securities, the Fund offers exposure to emerging markets fundamentals, historically characterized by lower debts and deficits, higher growth rates and independent central bank¹.

Market Review

In April, Ecuador generated outperformance, as did our ongoing overweight exposure to China’s local currency bond market. A lack of exposure to Brazil’s local currency market was an additional key contributor to YTD outperformance versus the Index. Our exposure to Mexico’s local currency market also boosted YTD outperformance versus the Index.

We have even greater confidence in our view that emerging markets (EM) – especially EM local currency – is about to be boosted by a unique and powerful combination of tailwinds.

As we wrote in our IMF Key Takeaways (Spring 2021 edition), the market is too bearish on EM debt, and is already discounting higher rates to a great extent.

These tailwinds for EM flow from what looks likely to be record-setting U.S. growth, ongoing U.S. fiscal stimulus and most risk markets at record highs. EM already had strong external accounts, and they look likely to become even stronger.

EM debt and EMFX are lagging other asset prices which are at record highs. EMFX is also lagging commodity prices fairly significantly. This will be harder to ignore over the coming months, with the likely release of positive data. Please see Exhibit 1 below.

Exhibit 1 – EMFX is Lagging Commodities

Source: VanEck. Historical data through May 2021.

The Commodity Research Bureau (CRB) Index acts as a representative indicator of today's global commodity markets. It measures the aggregated price direction of various commodity sectors.

Say hey to May.

May can be an important month. It’s when many managers of risky bonds ask themselves “what will September look like?” If the answer is “pretty nice”, which we think it will be, you have to have exposure to yield (“carry”) in the intervening months.

We end April with carry of 5.1%, duration of 5.6, and above 50% of the Fund in local currency.

Also, we have reversed our zero-exposure to Brazil local currency bonds. We are doing this because a) the bonds cheapened significantly; and b) the government has agreed to a band-aid solution that will nonetheless keep fiscal worries at bay for a while. We are more open-minded on duration again this month. For most of this year, we have had low duration, which was an important contributor to YTD outperformance versus the Index. We are now open to a range-bound treasury market for the coming weeks or months. Given bearish positioning, based on a continuation of treasury selloffs, we’re now more comfortable with a closer-to-neutral stance and an open mind.

Exposure Types and Significant Changes

The changes to our top positions are summarized below. Our largest positions in April are China, South Africa, Mexico, Colombia and Peru:

• We increased our local currency exposure in Peru and Colombia. Peruvian assets were hit hard by the far-left candidate’s surprisingly large lead in the first round of the presidential elections. The subsequent developments showed that the selloff was likely overdone. The candidate in question said that he will respect the constitution and the central bank's independence. There are also significant institutional barriers to changing the constitution. There are also signs that the state-owned oil company will not be allowed to default and is likely to be supported by the government a-la Mexico’s Pemex. In terms of our investment process, this improved the technical test score for the country. Colombia’s technical test score improved after a major selloff following President Iván Duque Márquez’s (Duque) decision to recall the tax reform bill. The setback was disappointing, but Duque pledged to put together a new proposal and work with the congress to avoid a rating downgrade.
• We increased our hard currency sovereign exposure in Ecuador and Tunisia. Ecuador’s economic outlook brightened after the presidential elections. Particularly in regards to fiscal consolidation and getting support from the IMF. The ratification of the framework trade agreement with the U.S. is a welcome sign. Ecuador is also likely to benefit from the improving global environment. In terms of our investment process, this improved the economic and policy test scores for the country. In Tunisia, we see stronger political support for engagements with the IMF and the World Bank. Talks between the government and trade unions about the reform agenda are particularly encouraging – as this will be key for an IMF program and for the country’s overall development. In terms of our investment process, this improved Tunisia’s technical test score.
• Finally, we increased our hard currency, quasi-sovereign exposure in Uzbekistan and hard currency corporate exposure in Jamaica. The Uzbek economy is recovering really well after the pandemic. The government’s fiscal stance remains prudent, while a stable stream of remittances provides an important safety net. These were important considerations for the new sovereign issue (in addition to attractive valuations). In terms of our investment process, this improved the country’s economic and policy test scores. As regards Jamaica, we were watching this corporate for some time, hoping for a turnaround. The recently announced possible asset sale might prove to be such future catalyst.
• We reduced our local currency exposure in Indonesia and Mexico, and hard-currency quasi-sovereign exposure in Mexico. The main concern in Indonesia is that the second wave of the COVID virus and delays in vaccinations can dampen the growth outlook and negatively affect fiscal performance. In terms of our investment process, this worsened the economic test score for the country. In Mexico, we sold a longer-dated local bond that was not trading well amidst duration concern, and also sold a USD-denominated longer-dated Pemex bond as we needed cash for other purchases. Our investment process reflected the worsened technical test score for the country.
• We also reduced hard currency sovereign exposure in Angola, despite the fact that higher oil prices marginally improve the growth outlook. Concerns about Angola’s debt sustainability refuse to go away, and this worsened the economic test score for the country.
• We also reduced hard currency corporate exposure in China, Hong Kong and Ukraine. As regards China and Hong Kong, our decision reflected growing concerns that the developments surrounding the financial conglomerate Huarong will spill over into other high yield bonds. We also sold one particular real estate developer bond due to concerns about governance and transparency. This included delays with releasing information and performance numbers. The issues were eventually resolved and the bond rallied, but as a result, there was more downside to the price going forward. As regards Ukraine, we reduced the overall country exposure due to higher geopolitical risks and the Ukraine-Russia tensions.

Fund Performance

The performance for VanEck Emerging Markets Bond UCITS (Class USDI1) was 3.21% in April compared to of 2.24% for the 50/50 J.P.Morgan Government Bond Index-Emerging Markets Global Diversified (GBI-EM) local currency and the J.P. Morgan Emerging Markets Bond Index (EMBI) hard-currency index.

Average Annual Total Returns (%) as of 30 April 2021

^†Monthly returns are not annualized.

¹Life performance for the 50% GBI-EM/50% EMBI - USD benchmark is presented in U.S. Dollars (USD) as of Class I1 inception date of 20/8/2013.

Past performance of the Sub-Fund is no guarantee for future performance. Any performance presented here in is for illustrative purposes only. Historical information is not indicative of future results, current data may differ from data quoted. Performance information does not take into account the commissions and costs incurred on the issue and redemption of units. Performance information is presented net of fees, but gross of tax liabilities. Each index listed is unmanaged and the returns include the reinvestment of all dividends, but do not reflect the payment of transaction costs, fees or expenses that are associated with an investment in any fund. An index’s performance is not illustrative of a Fund’s performance. You cannot invest in an index.