This Emerging Markets Bond ETF Pairs Yield and Growth
A developing macroeconomic environment may be offering possibilities in debt markets of emerging economies. Exploring this option may be beneficial, particularly if the aim is to combine a steady income with expansion.
The EM rally after the start of the COVID-19 pandemic in 2020 was hindered by increasing interest rates and a stronger American currency. Typically, when the local currency performs well, it leads to strength in EM assets. However, if the local currency weakens against the strong dollar, it can result in vulnerability.
Nevertheless, with global central banks shifting away from restrictive monetary measures, there may be an opportunity for emerging market assets, such as bonds, to experience a positive upward trend. This observation was emphasized by Janus Henderson, a renowned global asset management company, in their comprehensive market analysis report.
"Contrary to what the news suggests, numerous developing economies continue to show resilience, thanks to their efforts in stabilizing their financial situation and enhancing their debt performance," they remarked, highlighting considerable advancement in terms of actual Gross Domestic Product growth as a contributing factor.
The report also mentioned that emerging market (EM) countries are in a positive position because they have a lot of room to ease their monetary policies. This is because their real interest rates are higher compared to other countries and their inflation dynamics are improving. Global supply chains are becoming more normal, particularly in China, leading to a decrease in EM inflation. Many EM central banks started raising interest rates before other countries, but now that inflation is falling, some of them, like Brazil and Mexico, are considering reducing rates. This provides a safety net for EM economies, although not all of them are in the same situation. Overall, the response of EM economies to combat rising inflation strengthens their policy credibility, according to the report.
Government Debt: A Lucrative EM Opportunity
Investors who are interested in taking on some credit risk, but not too much, should consider investing in government debt from emerging markets. This is precisely what the Invesco Emerging Markets Sovereign Debt ETF (PCY) focuses on.
The basis of PCY is the DBIQ Emerging Market USD Liquid Balanced Index. This index monitors the possible profits of a hypothetical collection of easily traded emerging market government bonds denominated in US dollars, which are issued by over 20 emerging market nations. The countries included in the index are chosen every year according to a unique method developed by the index itself.
At the moment, approximately 15% of its investments are in bonds issued by the Kenyan government. Considering the potential for growth in the country, this presents a significant chance to achieve returns and expansion.
According to a report by Reuters, the economic growth of Kenya is anticipated to accelerate slightly in the current year. The country's economy is projected to expand by 5.0% in 2023, as stated in the latest biannual Kenya Economic Update report by the bank, which shows a slight increase from 4.8% recorded the previous year.
As of August 9, the fund's Securities and Exchange Commission (SEC) yield for the past 30 days stands at 7.72%. Additionally, the fund has a distribution rate of 6.36% over the course of the last 12 months.
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