Last week the U.S. Federal Reserve may have lit a small fire under the emerging bonds market. Already boasting double-digit returns this year, bonds from the developing world are the hot ticket this year, contrasting with the lacklustre performance on stocks or commodities.
The Fed’s move is likely to increase this divergence in returns.
Essentially the Fed has decided it will reinvest proceeds from its maturing mortgage investments back into Treasury bonds, thus keeping market liquidity levels high and signalling to the world its belief that the U.S. economy is still weak enough to need financial stimulus. Its action also leaves investors staring at the prospect of near-zero interest rates in the United States and the industrialised world for another year or so.
Such monetary stimulus is usually a godsend for stocks — something investors such as Phil Poole of HSBC Asset Management liken to a “comfort blanket” for investors. In 2009 for instance emerging stocks jumped 80 percent as global central banks unleashed torrents of liquidity onto world markets. But this year investors have been wary of boosting allocations to stocks — fearing that robust growth in emerging markets will not shield their export-oriented companies from the impact of a U.S. slowdown.
That has kept the MSCI emerging market stock index flat this year while the U.S. S&P 500 index has lost more than 2 percent.
“In the current environment, when people are concerned about growth slowing, it should boost emerging fixed-income more than stocks,” Poole says.