EM Debt’s Time to Shine
August 23, 2022
Read Time 1 MIN
Emerging markets (EM) central banks hiked early and large, and we believe U.S. sanctions are backfiring and undermining developed markets (DM) currencies in favor of EM commodity-based currencies. Additionally, fire-sale levels of high-beta EM credit spreads in USD have enabled us to accumulate in July. This is yet another reason why, following the devastation of the first half of 2022, we have adopted a bullish position on EM debt.
The Emerging Markets Bond Fund (the “Fund”) was up 2.87% in July, compared to 1.59% for its benchmark. July’s 128bp of outperformance brings YTD outperformance to 412bp. Year-to-date, owning no Russia, navigating Ukraine and not keeping our duration view on “autopilot” drove performance, as did the Fund’s exposures to high-beta EMFX, particularly South Africa, Colombia, Brazil, Chile, Mexico and Poland. For detailed Fund performance and EM debt outlook, download the commentary.
This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Information provided by third-party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this communication and are subject to change without notice. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Duration measures a bond’s sensitivity to interest rate changes that reflects the change in a bond’s price given a change in yield. This duration measure is appropriate for bonds with embedded options. Quantitative Easing by a central bank increases the money supply engaging in open market operations in an effort to promote increased lending and liquidity. Monetary Easing is an economic tool employed by a central bank to reduce interest rates and increase money supply in an effort to stimulate economic activity. Correlation is a statistical measure of how two variables move in relation to one other. Liquidity Illusion refers to the effect that an independent variable might have in the liquidity of a security as such variable fluctuates overtime. A Holdouts Issue in the fixed income asset class occurs when a bond issuing country or entity is in default or at the brink of default, and launches an exchange offer in an attempt to restructure its debt held by existing bond holding investors. Carry is the benefit or cost for owning an asset.
Investing involves risk, including loss of principal. You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. The Fund is subject to risks associated with its investments in below investment grade securities, credit, currency management strategies, debt securities, derivatives, emerging market securities, foreign currency transactions, foreign securities, hedging, other investment companies, Latin American issuers, management, market, non-diversification, operational, portfolio turnover, sectors and sovereign bond risks. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. As the Fund may invest in securities denominated in foreign currencies and some of the income received by the Fund will be in foreign currencies, changes in currency exchange rates may negatively impact the Fund’s return. Derivatives may involve certain costs and risks such as liquidity, interest rate, and the risk that a position could not be closed when most advantageous. The Fund may also be subject to risks associated with non-investment grade securities.
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November 22, 2022
While China was the biggest detractor in October, we believe our decision to retain our country holdings will prove prescient as China begins reopening.
November 17, 2022
Compared to the U.S. and other developed markets bonds, EM bonds not only provide significantly higher nominal and real yields on average but also shorter durations.
October 31, 2022
Coming out of the Fall 2022 IMF meetings, investor reactions were overwhelmingly dominated by US rates and geopolitics.
October 21, 2022
While the Fund underperformed its benchmark in September, it continues to outperform its benchmark year-to-date, in part, due to active management of duration and EMFX.