Emerging markets: What do the bonds from them offer the investors?

In the light of the poor market performance of the bonds floated by the developed economies of the European Union, it is the bonds of emerging markets that are shining brighter than before.

It is quite surprising to see Europe mired in various financial problems, while the emerging economies like the BRICS (Brazil, Russia, India, China and South Africa) grow up in prominence as far as their GDP (gross domestic product) is concerned.

Emerging economies and the European Union

Currently, most of the emerging economies have executed a number of prudent fiscal as well as monetary policies to reform their individual socio-economic set up. Moreover, they’ve taken some really pro-active measures to fortify the banking systems of their country.

There is a lot of speculation that the growth saga of the Chinese economy has well past its prime. However, if recent economic data are to be believed, then they’ll reveal that these emerging economies have performed much better in terms of GDP as compared to many of their developed counterparts.

Additionally, this growth of the emerging markets can be attributed to their urbanization and the birth of financially stable middle-class consumer group. As a result, local companies are working out plans to exploit these vast swathes of untapped consumer market.

Emerging market bonds – Some basics of investments

In case of emerging market debt, investors need to choose whether or not they want to put their money in a local currency denominated fund, hard currency or a mixture of both.

Speaking about hard currency debt, these are usually floated by the countries during the early stages of their development. In addition, these bonds are issued when overseas investors are willing to provide loans only in dollars and not in any other currency whatsoever.

Alternatively, local currency debt or bonds are issued when the respective issuer (the government) has been successful enough to establish a dependable financial sector that includes the banks, insurance as well as the pension industry. Due to this fact, investors who buy these types of bonds may well get access to more robust companies and that too in a stronger emerging market.

Emerging market currencies – Their prospects

According to some economists, currencies of the emerging markets have the potential to become stronger and play a more dominant role in the global economy. This may happen because of the bond buying programs (quantitative easing) undertaken by the developed economies like U.S put a lot of strain on their own currencies.

Actually, investors from the developed economies like U.K or U.S can get exposure to local-emerging market bond funds like Mexican peso, Chinese yuan or Indian rupee to diversify and rebalance their portfolio. Though these bonds spell handsome currency appreciation over the term of their maturity, yet investors should evaluate their risk tolerance before investing.

Therefore, investors with the right market knowledge and investing acumen can take advantage of an asset class that promises better growth and provides lucrative yield in a world where the scope of making money is reducing by the day.

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