In recent decades, the concept of investment has been revolutionised by technological novelties. Online trading of today is nothing like the old-school systems of the ’90s when every move required phone conversations between clients and brokers. In Asia, aspiring investors can master the art of trades through local intermediaries. From currencies to derivatives, the arsenal is wide. Emerging market bonds are gaining traction for several reasons.
Definition of the Instrument
So, what bonds belong to the category? These securities are released by businesses or governments of developing nations. These smaller countries (including Thailand) are seen as prone to abrupt economic changes and general political unrest. Their financial systems are still in the process of formation.
The securities may come from many Latin American countries, such as Chile and Mexico. In the Asian region, Thailand is joined by Indonesia, Malaysia, the Philippines, and a few other states. Bonds from Russia, Poland, or Belarus are also classified as emerging market securities.
Evolution of the Instrument
In the early 1990s, these assets were seen as outrageously volatile. Today, they occupy a bigger and more mature slice of the global market. Nations seen as emerging or developing have made considerable progress politically and financially. Over the decades, domestic fiscal policies have become more balanced. Thanks to reliable brokers like FXTM, investment opportunities in Thailand are now abundant.
This does not mean that emerging countries are now on par with established economies. They still suffer from a budget deficit and national debt. However, the overall level of financial management has obviously improved. Finally, these smaller-scale systems are developing at a higher pace.
Probability of disruptions explains the higher level of risk associated with the trading instrument. The upside is the relatively high yields — the key factor in the appeal. Thus, these securities are for the daring, not for the risk-averse. They are perceived as a means of gaining long-term returns.
Evaluation of Risk
The performance of such bonds is measured by the J.P. Morgan EMI Global Diversified Index. Over the 10 years until December 2013, the average annual return was estimated to be 8.43%. This was slightly higher than for the emerging market debt fund. Meanwhile, over the same period, investment-grade bonds from the US showed merely 4.71% of average annual return.
- If you cannot bear high volatility, this type of bonds will hardly suit you. Returns are highly changeable in nature. However, investors who take the long view may be willing to use the instrument.
- In short-term scenarios, you may be better off with more conservative options. High volatility can put your capital at immediate risk.
All in all, in terms of risk and reward, it is possible to position these securities between high-yield bonds and investment-grade bonds from corporations. Modern investors receive lower returns than decades ago but enjoy more stable pricing. Volatility is still present, given the probability of economic and political shocks. Today, emerging market bonds are increasingly used in diversified portfolios.
Value for Diversified Portfolios
Emerging market bonds are often included in portfolios with bonds from developed nations. The two markets do not always show correlation. Such combinations (when instruments move in different directions) are well-suited for diversification purposes. Prudent investors may manage currencies, stocks, and derivatives, at the same time.
- The more assets you have — the higher your potential gains.
- Risks are lower, as they are spread over a set of different instruments.
- Losses made in one realm are compensated by returns elsewhere, so the investment strategy is balanced.
Countries may issue their debt in different ways. In emerging markets, it may be denominated in USD or the local currency. For instance, Brazil may sell its bonds for dollars or the real. For investors, denominations define volatility. As you may guess, the USD makes the instrument more stable, while local currencies increase the volatility potential.
Everything depends on your personal attitude to risk. Here, like elsewhere, higher risks are linked to higher potential returns. Government-issued bonds may be purchased directly through exchange-traded funds (ETFs), or mutual funds that invest in assets of a certain denomination.
Bonds issued by corporations from the developing world are increasingly popular. These bonds are part of the strategy for many emerging market funds. The assets may also be traded directly through ETFs.
The Bottom Line
Emerging market bonds are issued by governments or corporations of countries classified as developing. Their economies are still evolving, which accounts for a higher probability of disruptions. The inherent volatility has an obvious upside — higher yield potential.
Denominated in USD or local currencies, these bonds may be purchased through ETFs or emerging market funds. Overall, they offer a popular way of portfolio diversification, as emerging markets do not always move in line with the largest world economies.