Recent Weakness in Emerging Markets and High-Yield Sectors Has Resulted in Attractive Yields
Hungry for yield? If so, fragile market confidence in emerging markets and high-yield bonds could be viewed as a great opportunity to invest selectively.
Emerging markets debt is not all the same. Against a backdrop of uneven global growth, variation among country fundamentals and policy responses has created meaningful differences in bond valuations, yields and currencies. Investor sentiment could continue to be fragile in the face of slowing growth in China, lower commodity prices and prospects for higher U.S. interest rates.
Broadly speaking, high-yield corporate bonds offer relatively attractive yields. But there is a clear division in the market. As oil and commodity prices declined, yields for U.S. energy sector and metals and mining sector issues have risen much more than the rest of the market. But while financial stresses have become more apparent among commodity-related issuers, in other sectors solid fundamentals are more prevalent. Meanwhile, depending on an investor’s net tax burden, high-yield munis may offer even higher yields.
Though some currencies may depreciate further, emerging economies are generally in better shape to weather near-term challenges. In addition to dollar-denominated bonds, certain local markets offer relatively attractive total return potential. In high yield, valuations within the energy sector appear particularly attractive, but selectivity is also essential. Credit research can help identify those firms that appear better positioned to navigate this environment.
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