Why Emerging Market Debt Still Looks Attractive

Investors have tended to pull money from U.S. equity funds in the month before election day in the past four presidential elections, EPFR Global data show. Market volatility usually subsides after elections. We could see a turn in sentiment toward emerging market (EM) assets if this year’s anti-trade rhetoric increases, but for now we like EM debt due to economic green shoots and investor appetite for income in a world starved for yield.

Market Realist – Emerging market equities are under pressure

In the wake of political uncertainty, investors tend to be more cautious by withdrawing money from the market. This year, domestic stock mutual funds have witnessed net outflows in 27 out of 29 weeks up until July. According to data from the Investment Company Institute, stock funds have witnessed net outflows worth $28 billion up until July 2016, compared to inflows worth around $16 billion into bond mutual funds.

Why Emerging Market Debt Still Looks Attractive

Market Realist – Volatility to subside

During the last two months, equity markets (IVV)(IWF) have experienced increased volatility amid economic and political uncertainty. The CBOE Volatility Index is currently trending near its two-month high. However, past trends suggest that volatility is likely to lessen once elections are over. In the short term, the Fed’s macroeconomic policies are likely to drive the markets.

Amid fears of a rise in interest rates in the United States, emerging market (EEM) shares tumbled almost 4.5% in the second week of September, disrupting a year-long rally that pushed valuations to the highest level in six years. In the short term, emerging markets are likely to remain under pressure as chances of the Fed hiking rates in December are very high.

However, emerging market debt (EMB)(LEMB) that offers much higher yield than developed markets are in a sweet spot. According to data from eVestment LLC, around $510.7 billion’s worth of institutional assets is injected in emerging market debt as of June 30, an increase of 7.9% over December’s end. Higher economic growth and rising credit quality are driving emerging market debt. Plus, the falling risk premium in emerging market bonds makes them more appealing to investors seeking higher yield.