The dreaded fiscal cliff, should it come to pass, could have
an adverse impact on myriad asset classes. From dividend stocks
to high-yield bonds to select commodities, riskier assets of all
stripes could come under pressure if U.S. policymakers cannot
avert the GDP-draining fiscal cliff.
One of investors' favored asset classes of 2012, emerging
markets denominated in local currencies, could feel a pinch, too.
However, in the eyes of one portfolio manager, any damage induced
by the fiscal cliff on emerging market bonds may not be severe as
some are predicting.
In years past, capital allocated to emerging markets was
viewed as so-called "hot" money, meaning investors viewed
developing markets debt as a trade, not an investment. That
situation has abated in 2012.
"EM local currency bonds are becoming more strategic, as
opposed to purely tactical, allocation for many investors," said
Market Vectors Portfolio Manager Fran Rodilosso. "We believe the
market is supported by, in addition to the underlying
fundamentals, improved liquidity, expanding yield curves, and a
greater opportunity to diversify. In other words, the money that
has flowed in this year might not be as 'hot' as in previous
Inflow data supports Rodilosso's assertion about flows to local
currency bond funds being stickier this year than in previous
years. One prime example comes by way of the Market Vectors
Emerging Markets Local Currency Bond ETF (NYSE:
), which Rodilosso manages.
In late November, Market Vectors announced
EMLC had topped $1 billion in assets under
. The fund enters trading today with with over $1.16 billion in
AUM, but back on May 7, EMLC had "just" $743 million in
Rodilosso does admit that not all the hot money is out of the
"We witnessed underperformance of EM local debt in 2011, due
in part to outflows on a flight-to- quality trade, so that type
of hot money is still indeed there," he said in a statement
issued by Market Vectors."But the progression towards more
permanent allocations and, ultimately, lower volatility still
appear to be in place."
EMLC's rivals are gaining assets as well. The iShares Emerging
Markets Local Currency Bond Fund (NYSE:
) has seen its AUM total spike to almost $367 million from $150
million in just a few weeks. The WisdomTree Emerging Markets
Local Debt Fund (NYSE:
), the first actively managed ETF to top $1 billion in AUM, has
added over 25 percent to its asset total this year.
If the fiscal cliff does arrive, local currency EM bond
could be hit on the perception that these funds represent a risky
asset class. Along those lines, it should be noted that over 60
percent of EMLC's lineup is rated investment-grade. Nearly 80
percent of ELD's constituents carry investment-grade ratings.
Rodilosso said a significant drop in U.S. growth could hamper
EM country fundamentals, but he also notes the appetite for local
currency EM bonds among institutional investors is growing.
That is not surprising given that investors still want yield.
The spread between 10-year U.S. Treasuries and the equivalent
Mexican sovereign issue is currently over 380 basis points. For
10-year Treasuries and the comparable Brazilian bond, the spread
jumps to 760 basis points. Brazilian and Mexican bonds are among
the top holdings in ELD, EMLC and LEMB.
Rodilosso also noted renewed interest in the dim sum bond
market, an asset class that many investors passed over through
the first three quarters of this year.
"The consensus seems to be forming that further yuan
appreciation over the medium-term can amplify higher rates that
most of these entities will pay via U.S. dollar- or
Investors looking for exposure to dim sum bonds can use either
the Market Vectors Renminbi Bond ETF (NYSE:
) or the PowerShares Chinese Yuan Dim Sum Bond Portfolio (NYSE:
). Those funds have effective durations of 1.91 and 2.78 years,
For more on emerging markets bond ETFs, click
(c) 2012 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.