The immediate blow that Brexit dealt to the stock market has passed. Now, it is time to reconsider less risky zones that can fetch investors sturdy gains.
The age-old belief is that emerging markets (EM) are risky plays than developed economies. But does this phenomenon hold good today? With very few really knowing the exact impact of Britain leaving the European Union (EU), the fear levels are high on the market due to the UNCERTAINTY (read: Top ETF Stories of the First Half of 2016).
The financial world kept mulling over when Britain and EU would actually separate or how smooth the parting will be in financial terms? Most analysts have speculated that U.K. will slip to a recession in the coming days and the event will lessen global growth. In such a scenario, concerned regions including Britain and the rest of Europe do not seem very safe investments at this moment.
This is especially true as the market has recouped all Brexit-related losses in the post-Brexit bounce to close out the quarter. And it has again returned to fair valuation. But what about emerging markets?
EM Investing Awaiting a Brexit-Boost?
EM investing apparently looks less perturbed by the Brexit issue. Going by an article in CNBC, EM investing will not be hurt that much save a huge upheaval in broader Europe, per BNP Paribas. And this impact will not be “in political terms but in trade terms” (read: British ETFs in Focus as Brexit Debate Flares Up).
Also, an article published in barrons.com, says that very few emerging markets share extensive trade relations with U.K. This is because the extent of trade agreement between well-off countries is way bigger than that between wealthy developed countries and still-striving emerging economies. Exports to the U.K. by the broad-based emerging market are meager, thus posing no-to-little threat to emerging market investing (read: Emerging Market ETFs--Value Play or Value Trap?).
Investors should also note that when pound and euro are struggling and the greenback is down year-to-date, Brazilian real and the Russian rouble are quite steady (read: Pound ETF Plunges: More Sell-Off in the Cards?).
Also, most developed central banks including the Fed will likely remain dovish in the coming days to guard against the Brexit fallout, keeping bond yields low and leaving emerging markets as perfect choices for solid current income. Fading hope of frequent Fed hikes this year should also bring some relief to emerging market securities.
EM Bond Investing a Better Bet
In the present situation, investors’ craving for steady current income is warranted. Now EM securities are now known for their solid yields. Also, emerging market currency bonds and the related ETFs provide investors greater protection to capital gains than EM equities.
Keeping this in mind, we highlight a few local-currency denominated EM bond ETFs that offer smart yields. Since the greenback is less likely to shoot up in the near term, the case for local currency bond investing would be apt at the current level (read: Enjoy High Yield with These Low Beta EM Local Currency Bond ETFs).
PowerShares Emerging Markets Sovereign Debt ETF(PCY - Free Report) – Yield 5.13%
The ETF includes bonds issued by Mexico, Panama, Peru, Uruguay, Venezuela, Bulgaria, Russia, South Africa, Turkey, Brazil, Colombia, Indonesia, Korea, Philippines, Qatar, Argentina, El Salvador and Vietnam.
WisdomTree Emerging Markets Corporate Bond Fund (EMCB - Free Report) – Yield 4.48%
Gives exposure to the countries like Brazil, Hong Kong, China, Russia and Mexico.
First Trust Emerging Markets Local Currency Bond ETF(FEMB - Free Report) – Yield 5.13%
Brazil, Turkey, Indonesia, Mexico and South Africa are its top choices.
SPDR Barclays Emerging Markets Local Bond ETF(EBND - Free Report) – Yield 4.77%
Brazil, South Korea, Mexico and Malaysia take the top four spots in the fund.
iShares Emerging Markets Local Currency Bond ETF(LEMB - Free Report) – 30-Day SEC Yield 4.36%
South Korea, Brazil and Mexico are the fund’s top three holdings.
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