Emerging Markets Safe Bet as Developed-Country Economic Growth Slows

Latest financial trends show that emerging markets turn to be a better choice when it comes to investment than developed markets.

“Emerging markets look to be a strong bet this year, one of the best bets for U.S. investors”, Rick Rieder, chief investment officer of Global Fixed Income for Blackrock said.

In a speech at the Morningstar Investment Conference in Chicago, Rieder underscored that the relative risks of investing in emerging markets, where risks are traditionally higher, have come down compared to developed markets, where economic growth has slowed and geopolitical concerns have lingered.

“The risk today is in the developed world, where yields are low, whereas emerging markets have been showing strong growth and have high yields. You’re essentially getting paid to go where the risk is the lowest,” said Rieder.

Moreover, even as debts in developing markets declined, their yields have maintained a high level than those of Japan TMBMKJP-10Y, +36.77%   and the U.S. TMUBMUSD10Y, -0.34%. Hence, the bonds tend to produce lower returns if the borrower owns less debt, and therefore, is less likely to default on their interest payments.

In the beginning of the 21st century, South Africa suffered from excessive leverage, with its debt-to-GDP ratio hovering near 150%. However, new governments have cut back on borrowing and tightened belts enough to push the ratio below 50% in 2016. Although South Africa’s economy is considered relatively spendthrift, its debt levels are now lower than France, Spain and Italy. The South African 10-year bond EMBMKZA-10Y, +0.40% offers an 8.73% yield.

The decrease of interest rates on global level goes in favor of emerging markets. Stockholders hunting for yields have plunged into the far corners of the investment universe, investing in countries like Venezuela, which analysts say is on the verge of default.

On the other hand, emerging-market debt is not without risks. Such assets tend to do better when commodity prices are high, the U.S. dollar DXY, +0.02%  is weak and interest rates in developed markets are low. If central banks tighten monetary policy, a repeat of the “taper tantrum” could cut their honeymoon short.

Read more at MarketWatch.