Emerging Market corporate bonds: equity-like returns with lower volatility

Investors across the globe have had to grapple with rapidly changing US policies, affecting everything from the US domestic economy, long-held North American trade pacts, the Russia-Ukraine war and the Israeli-Palestinian conflict. This has resulted in elevated levels of uncertainty and increased volatility in financial markets. Despite this, a corner of the fixed income asset class that is overlooked by many has delivered strong returns. Emerging Market (EM) hard currency corporate bonds have fared strongly against many other asset classes and offer a compelling investment case today.

In this Investment Insight, we asked six experts from our investment team six key questions to give an overview of the asset class and why it deserves closer attention.

How do EM corporate bonds fit into a multi-asset portfolio?

The asset class has had good returns over the long term (over 8% per annum in US dollar terms for the high yield component over the past 20 years, see table) with significantly lower volatility than other risk assets. We believe the asset class is often misunderstood with the perceived risks being greater than the actual risks.

By adding EM hard currency corporate bonds to a multi-asset portfolio, you can generate ‘equity-like returns’, close to 10% pa, with almost half the volatility of equity markets 

Our focus is on shorter-duration bonds offering attractive income yields. They provide strong visibility on return outcomes over shorter investment periods (which you can’t get from equities) and help manage the volatility of a portfolio. We also dynamically manage the risk/return profile of our multi-asset portfolios by varying the asset allocation to this asset class.

Read the full article here