With the outlook grim for bonds in developed markets, investors may be better off looking to emerging market debt, a fixed-income portfolio manager says.
“When you think about the outlook for developed bond markets, it’s not really an interesting place to be invested, from a total return perspective,” said Richard Lawrence, senior vice-president of global fixed income at Brandywine Global Investment Management in Philadelphia, Pa., in a March 23 interview.
While low-yielding debt from Europe, the U.S. and Japan is dragging down performance, Lawrence said some emerging market bonds are yielding 7% or 8%.
“We think we’re in the beginnings of a significant cyclical upswing for the global economy,” said Lawrence, who manages the Renaissance Global Bond Fund.
A “wall” of fiscal and monetary support combined with the global vaccine rollout should lead to a broad-based cyclical upswing, he said. The improved outlook for commodities will also help emerging markets by boosting resource exports.
The large emerging markets that Lawrence likes — Mexico, South Africa, Brazil, Colombia, Indonesia and Malaysia — have current account surpluses, partly because they were importing less last year during the worst of the pandemic, he said. “It certainly does create a tailwind for those markets and those currencies.”
Lawrence cautioned that he doesn’t like all emerging market debt. Fund managers watched Turkey’s currency, stocks and bonds fall dramatically last week after President Recep Tayyip Erdogan fired central bank governor Naci Agbal shortly after he added two percentage points to Turkey’s benchmark interest rate.
It’s been a miserable quarter for developed bond markets, with the yield on 10-year U.S. Treasuries rising to 1.75% in March. Investors have bet on reflation amid massive U.S. stimulus, ongoing loose monetary policy and optimism for an economic rebound as vaccines are distributed.
Lawrence said the movement in U.S. Treasury yields has pushed emerging market bond yields a bit higher as well, which he said further supports his portfolio.
This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.