Watch/Listen

How will central bank tightening affect emerging market bonds?

Rajeev de Mello explains that emerging markets are prepared for tighter monetary policy and highlights the Asian countries offering the most attractive yields.

16/08/2017

Rajeev De Mello

Rajeev De Mello

Head of Asian Fixed Income

Emerging markets are prepared for central bank tightening

Investors are worried; they’re hearing noises from the US Federal Reserve and the European Central Bank about reducing balance sheets and hiking rates. They are wondering whether that will have an impact on emerging markets and on Asian bonds.

In the past, they’ve been right to worry. Generally, when central banks start tightening, it does affect emerging markets.

However, this time round, we’ve already had that event happen back in 2013, so the markets have got over it already.

The central banks in the West and the Bank of Japan have been careful to talk about a very gradual normalisation of the exit from very low interest rates and a very gradual reduction of their balance sheets.

So, there are no surprises, there’s plenty of communication and we think emerging market investors are well set up. Those that are invested should remain confident that we will not see a big drop off in values - at most, a small correction.

Which Asian countries offer the best yields?

In this very low global environment for volatility, we have to look for yields. Within Asia, we identify countries which have higher yields and very stable macroeconomic fundamentals.

Indonesia is one of the countries which we favour: 7% yields for 10-year bonds; a very stable currency; low deficits including a low trade deficit. These are generally all positives for bond investors.

India is another country we like: 6.5% yields around the 10-year part of the curve; also, low central government deficit; a lot of foreign inflows; stable currency.

China’s bonds also offer potential for investors: 3.5% yields but also the opportunity to have an offset in case there is some risk coming from China. Government bonds are usually the safe haven that investors flock to.

Important information: The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.  Exchange rate changes may cause the value of any overseas investments to rise or fall. Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors. Issued by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.