Is it a good time to buy emerging market bonds? (2024)

Is it a good time to buy emerging market bonds?

Consider EM bonds carefully

Emerging markets had a strong start to 2024, posting positive total returns despite significant headwinds from the move higher in US interest rates. Emerging market countries and corporates with lower ratings performed particularly well with spread compression occurring across regions and market segments.

There are indications that interest rates may start to fall in the near future, with widespread anticipation for multiple interest rate cuts in 2024. Falling rates offer the potential for capital appreciation and increased diversification benefits for bond investors.

The tactical reasons to favour emerging markets today include the growing likelihood of a soft landing for the global economy. The return of inflation towards many central banks' 2% target makes interest rate policy look too restrictive.

Answer: Now may be the perfect time to invest in bonds. Yields are at levels you could only dream of 15 years ago, so you'd be locking in substantial, regular income. And, of course, bonds act as a diversifier to your stock portfolio.

At current levels, we believe bonds yields are high enough to offset any potential volatility in US Treasuries and other potential shocks. In our base case scenario, we expect double-digit returns for emerging market sovereign bond yields in 2024, as shown in the top left quadrant of Exhibit 6.

A slight acceleration for advanced economies—where growth is expected to rise from 1.6 percent in 2023 to 1.7 percent in 2024 and 1.8 percent in 2025—will be offset by a modest slowdown in emerging market and developing economies from 4.3 percent in 2023 to 4.2 percent in both 2024 and 2025.

Should I only buy bonds when interest rates are high? There are advantages to purchasing bonds after interest rates have risen. Along with generating a larger income stream, such bonds may be subject to less interest rate risk, as there may be a reduced chance of rates moving significantly higher from current levels.

After bonds are initially issued, their worth will fluctuate like a stock's would. If you're holding the bond to maturity, the fluctuations won't matter—your interest payments and face value won't change.

Why not to invest in emerging markets?

Emerging markets may have unstable, even volatile, governments. Political unrest can cause serious consequences to the economy and investors. Economic risk. These markets may often suffer from insufficient labor and raw materials, high inflation or deflation, unregulated markets and unsound monetary policies.

Consensus expectations call for a recovery in global earnings growth in 2024. Emerging market earnings growth is expected to accelerate to 18% in the year ahead, driven by South Korea and Taiwan. This represents a sharp recovery from the contraction in 2023.

Emerging Markets Can Outperform Even If a US Recession

Malcolm Dorson, a money manager at Global X Management in New York, also said emerging markets are better-positioned than major economies in the wake of the pandemic.

Money held in an interest bearing account like a money market account, a savings account or others is generally safe from losses stemming from a stock market decline. Bonds, including various Treasury securities can also be a safe haven.

Key takeaways. Relatively high yields on investment-grade bonds are reducing risks posed by interest rate uncertainty and creating a favorable environment for investors in the second half of 2024.

Bonds have an inverse relationship to interest rates. When interest rates rise, bond prices usually fall, and vice-versa.

Consider EM bonds carefully

The relatively high yields and likelihood of rate cuts by global central banks have created a tactical investment opportunity. In addition to high yields, EM local-currency bonds can provide diversification and the potential for capital gains.

Emerging market investments can provide diversification and potentially rapid growth to a portfolio, but they can also be risky. TUR and GLIN are among the best-performing emerging market ETFs this year. You may also be able to buy individual emerging market stocks, although this may not be right for every investor.

We continue to forecast about 4% average 2024 GDP growth for emerging markets worldwide, led by growth of about 5.0% for emerging Asia. We anticipate growth of 2.0%–2.5% for emerging Europe and Latin America, though U.S. growth could have positive implications for Mexico and all of Latin America.

We believe emerging markets will provide richer investment opportunities than developed peers over the next decade, driven by technological innovation, continued urbanization and shifting geopolitical and global trade dynamics.

Will the market be better in 2024?

Overall, Yardeni Research forecasts S&P 500 operating earnings at $250 in 2024, up 12% vs 2023. He puts them at $270 in 2025 (up 8%) and $300 in 2026 (up 11.1%). These figures compare with analysts' consensus forecasts of $244.70 in 2024, $279.70 in 2025 and $314.80 in 2026.

Thus, 8% of equities is a reasonable benchmark for investors who are taking a hands-off approach and aren't aiming to make active bets on or against emerging markets.

I bonds issued from May 1, 2024, to Oct. 31, 2024, have a composite rate of 4.28%. That includes a 1.30% fixed rate and a 1.48% inflation rate. Because the U.S. government backs I bonds, they're considered relatively safe investments.

Are Treasury bonds a good investment? Generally, yes, but that depends on your investing goals, your risk tolerance and your portfolio's makeup. With investing, in many cases, the higher the risk, the higher the potential return. This applies here.

Bonds could return as much as stocks, with far less volatility. Note: The projections use the MSCI U.S. Broad Market Index as a proxy for stocks and the Bloomberg U.S. Aggregate Index as a proxy for bonds. Source: Vanguard Capital Markets Model projections, as of December 31, 2023.