While the investment universe extends well beyond the coastline, Australian investors like to stick with what is familiar.
“[Emerging markets] are probably at a different juncture point to the major economies,” says David Little, Morningstar senior analyst in manager research. “The cycles can be different, which can help diversity, but they are not as defensive as traditional government bonds.”are interest-rate risk in the form of “duration” and credit risk . Companies that issue high-yield debt are further down the credit spectrum, which is why investors demand extra premium.
Both funds currently report yields to maturity between 7 and 8 per cent, but the high-yield fund has a duration of about 3.5 years, whereas the emerging markets fund is longer than seven years. Research from Fine’s team says the outlook for EM bonds is positive whether rates stabilise, keep rising or fall.
Recession is not off the cards. If the United States turns downwards, gloom will spread. If central banks respond by cutting rates, prices of investments that pay fixed income should rise. That’s the theory – and long-term bond yields indicate markets are expecting rates to subside.Little hasn’t noticed prices shifting materially higher to indicate fear of recession, as might happen if the market was genuinely worried.
Over the past year, an index of emerging market sovereign bonds has moved in greater synchrony with developed markets than over the past 10 years . As the pandemic fades into history, correlations might be expected to fall to longer-term averages.
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