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Emerging market bonds could perform especially well in a low-rate environment, and an analyst from Aberdeen Standard Investments picked three countries he likes — and one he doesn’t.
Central banks, especially in emerging markets, have been in easing mode, taking their cue from a dovish Fed. Federal Reserve Chair Jerome Powell’s prepared testimony on Wednesday also appeared to confirm expectations for a rate cut ahead.
Bond prices rise when interest rates fall because investors will seek higher yield in the form of previously issued bonds — which had higher interest rates. Additionally, emerging market fixed income generally offer higher returns than that of developed markets.
“We’ve kind of been in a bit of a Goldilocks period for emerging markets, ” said Brett Diment, head of global emerging market debt at Aberdeen Standard Investments.
“Slower growth means lower interest rates in the developed markets,” he said. While growth in emerging markets is decent, inflation is coming down which could cause central banks to cut rates, Diment said.
“In the context of what hopefully will be some sort of a resolution between the U.S. and China, that’s a pretty good backdrop for emerging market fixed income,” Diment told CNBC’s “Street Signs. “
Weighing in on individual markets, he said Brazil is one of his preferred picks in Latin America. The country has been trying to delay the retirement age. If successful, that would reduce the government’s spending on social security and lower its deficit, which could boost confidence in the market.
Diment also liked short duration, but not long duration bonds, in South Africa. “Growth has been quite weak in South Africa, so they might be cutting rates,” he said, noting that the economy shrank in the first quarter of 2019.
Russia could also be a good choice, he highlighted. Russia’s government has been “very prudent” in terms of borrowing, he said, adding: “A pretty good market for bonds, but the market’s already done relatively well.”
Finally, Diment said he was cautious on Turkey, citing tensions in the country. Turkish President Tayyip Erdogan reportedly sacked the central bank governor for refusing the government’s repeated demands for rate cuts.
When asked if investors can have hope that things will improve following the local elections — in which Erdogan was dealt a blow, he said: “Not in the short term, not in the medium term.”
— Reuters contributed to this report.