Domestic bond yields shot higher Wednesday following Election Day. That could give some fixed income investors pause about riskier corners of the global bond market. Those corners include emerging markets debt.
On the other hand, some experts believe there’s a compelling case for debt issued by developing nations. If that thesis proves accurate, it could benefit ETFs like the $2.76 billion VanEck J.P. Morgan EM Local Currency Bond ETF (EMLC ). U.S. equities rallied on the back of President-elect Trump’s victory Tuesday night. But emerging market bonds and stocks slipped on the news.
The reasoning behind that decline is partially attributable to speculation that Trump will employ tariffs against U.S. trade partners. And that would be inflationary. Should inflation heat up again, the Federal Reserve would likely have to raise interest rates. That could strengthen the dollar. A strong greenback often weighs on emerging market bonds. However, it’s possible EMLC could be more resilient than it’s currently being given credit for.
Tailwinds for EMLC
It remains to be seen, but there is some speculation that Trump’s tariff talk was simply campaign talk. It may be that the President-elect isn’t likely to employ punitive levies on emerging market trading partners. But he could use the specter of tariffs as a bargaining tool.
Should tariff talk prove to be no more than talk, EMLC could benefit. As things stand today, the fund’s recent weakness could prove to be a buying opportunity. That’s because of supportive macroeconomic factors in developing countries.
“Emerging market bonds stand to benefit from a range of factors: we expect economic growth to remain resilient into 2025, supported by robust private consumption, healthy investment and buoyant exports. Meanwhile, inflation has largely fallen to normal levels in many countries, which should allow for further monetary policy easing,” according to BNP Paribas.
The French bank also pointed out that in recent weeks, investors have been allocating capital to dollar-denominated and local currency emerging market bonds as well as corporate debt. That could be a sign money managers are comfortable with volatility caused by the U.S. election fading away. They may be more focused on inflation data and rate-cut odds in developing economies.
Another perk associated with EMLC could be its exposure to regions where central banks could soon be aggressive when it comes to rate cuts.
“We expect Latin America to remain ahead in lowering rates, led by Colombia, Chile and Peru. In eastern Europe, policymakers in Hungary, Czechia and Romania are likely to be among the most aggressive in cutting rates, while economies in, for example, Turkey and Egypt, have only recently achieved the kind of stability that could allow interest rates to be lowered in the quarters ahead,” concluded BNP Paribas.
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