Time for Emerging Markets?
The Morningstar Investment Advisor Conference and the Morningstar Investment Conference finished Friday. Presenters included Morningstar analysts and top money managers from various mutual funds and Exchange Traded Funds (ETFs).
One commonly mentioned theme was the strong position of “emerging markets” in comparison to many developed countries, especially for fixed income (bonds).
Emerging markets are less developed economies that are on their way to becoming developed. Think Brazil, Russia, India, China and Indonesia. These economies have stock exchanges, bond markets and financial regulations. Those institutions may be rudimentary but they exist.
The potential advantage of emerging markets is the possibility of faster growth in GDP and equity prices and higher interest rates on their bonds. Disadvantages are greater risk from political instability, fraud, illiquidity and currency fluctuations.
Some of the speakers at the Morningstar Investment Conference said this was an unusually good time for investments into certain emerging market bonds. The most intriguing reason cited was that some less developed countries now have lower government and private debt levels than many developed countries, including the US and many European countries. That lessens credit and currency risks.
One mutual fund manager put it this way: Emerging market bonds used to be considered risky and US Treasuries were considered safe. Now emerging markets seem less risky and US Treasuries seem more risky (because they are over-priced, not because of risk of defaults).
Another manager said many emerging markets now offer a better fiscal outlook, lower debt and higher yields. Long-term Treasuries are no longer an investment; they are an insurance policy for bad outcomes.
That last statement says a lot about the dilemma facing conservative investors seeking income. US interest rates for government guaranteed investments (Treasury bonds, insured money market and savings accounts) are so low that investors seeking income feel forced to consider investments like emerging market bonds.