Don't listen to emerging-market doomsayers.
Brazil’s real and South Korea's won may have been in free fall, but dollar-denominated bonds sold by developing-nation companies were the best best performer among 10 major global assets with a 3.5 percent return this year.
The crises of the 1980s and 1990s, when currency depreciation led to spiraling debt defaults across Latin America and Asia, have given emerging markets a bad rap when they are in fact more resilient in a climate of slumping commodities, slowing Chinese growth and rising U.S. borrowing costs. That is because the governments accumulated less dollar debt, amassed more foreign reserves and adopted flexible exchange rates, according to BlackRock Inc.
“When compared with the late 1990s, sovereign balance sheets have become less vulnerable to a stronger U.S. dollar,” said Sergio Trigo Paz, head of emerging markets fixed income at BlackRock in a note on July 28. “High yield emerging-market corporate bonds could be a good source of income for global investors.”
With about 20 percent of benchmark European government bonds yielding less than zero, emerging-market dollar-denominated debt is attractive, according to BlackRock. Emerging-market corporate and government debt yielded at least 3.5 percentage points more than U.S. Treasuries, according to data compiled by JPMorgan Chase & Co.
The Bank for International Settlements has repeatedly warned emerging-market companies are vulnerable to a stronger dollar and higher U.S. interest rates after a borrowing binge in recent years. Investors including Goldman Sachs Asset Management have said that the concerns are unwarranted because companies that borrowed foreign debt have either hedged their currency exposure or have steady dollar revenues to make good on payments.