5 Oct

Where to Spot the Right Investment Opportunities

WRITTEN BY Richard Turnill

On top of the world

So which sovereign bonds do we prefer from an investment point of view? We like US Treasuries as a hedge against “risk-off” episodes, though yields are historically low and our overall view on the asset class is neutral. We also hold a neutral view of European sovereigns but prefer selected Eurozone peripheral bond markets for their relatively attractive yields and the potential for increased buying under any expansion of the European Central Bank’s (ECB’s) asset purchase program. Emerging market sovereigns also could be prime beneficiaries from the search for yield over the medium term.

Market Realist: US government bonds are a strong option

The US economy is gradually gaining momentum and allaying fears of future slowdowns. Strong demand from foreign investors, driven by negative yields in many developed markets like Japan and Europe, has meanwhile caused US bond (AGG) (SHY) yields to lower substantially. But despite these lower yields, US government bonds (IEF) still seem to be a safe option in view of the prevailing global economic situation.

Where to Spot the Right Investment Opportunities

Peripheral European markets

Given the negative yields in major European markets, investors seeking higher fixed income return may explore peripheral European (IEV) markets that offer attractive yields. Turkey now offers the highest yield in the region on a ten-year government bond at 9.4%, followed by Greece (~8.3%), Iceland (~5.3%), Croatia (~3.4%), Portugal (~3.3%), Hungary (2.96%), and Romania (2.95%).

Emerging market debt

Emerging market debt (EMB) also looks appealing because of higher yields amid improving fundamentals and rising credit quality. The data from Bank of America Merrill Lynch and EPFR Global showed, for example, that emerging market debt (LEMB) witnessed inflows worth $30 billion during the first three quarters of this year.

Although emerging market debt has been bolstered by easy monetary policies in the developed world, emerging markets themselves follow normal monetary policies, indicating decent economic fundamentals.

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