Fundamentals back EM bonds despite “risky” | Australian Markets

Fixed income traders have been urged to rethink the “new reality” of rising markets (EM) versus developed markets (DM) bonds, as new analysis from exchange traded fund (ETF) specialist VanEck argues the standard misconceptions might be “short-changing” traders.

According to the paper Emerging Strength: Why EM Bonds are the longer term of fixed income, traders ought to look to shed the longstanding “misconception” of rising markets being “riskier” and increase their allocation to EM bonds to realize improved risk-adjusted returns. The analysis additionally indicated that the state of authorities spending has successfully reversed within the final 25 years, with EM governments in surplus territory in comparison with DM governments now accruing deficits.

The analysis discovered rising markets’ decreased authorities or whole financial system debt has supplied central banks with the consolation and suppleness to impact financial coverage targeting battling inflation with out having to fret about any flow-on influence on authorities financing. Developed markets additionally proceed to be hampered by geopolitical tensions, whereas these tensions act as tailwinds for rising markets.

“2025 has been marked by mass upheaval, and investors are having to challenge some long-held perceptions. The outperformance of emerging market bonds is not a new phenomenon, however geopolitical developments this year have brought alternative exposures into greater focus,” Arian Neiron, CEO of VanEck Asia Pacific, mentioned.

“To many, rising markets are synonymous with perceived risk resulting from a number of crises in in Latin America, Asia and Russia all through the 80s and 90s. However, these crises have been resolved many years in the past.

“The irony is that many of the negative characteristics commonly associated with emerging markets, such as highly indebted governments, gross budget deficits, and loose monetary policy, are more accurately attributed to developed markets – a shift that has become particularly pronounced in light of the US’ burgeoning debt.”

VanEck’s evaluation additionally examined the efficiency of passive and energetic ETFs within the Australian fixed income universe, and decided its VanEck Emerging Income Opportunities Active ETF (EBND) outperformed Australian hybrids, subordinated debt and company bonds to be the highest performing fixed income asset class in Australia over the one-year and three-year timeframes.

The paper additionally recommended an “active, unconstrained approach” – like that taken by the ETF – would benefit traders in navigating the “idiosyncrasies between the nations included in the EM universe and the nuances between the different types of bonds available”, effectively positioning traders to allocate to EM bonds as “the future of fixed income”.

“The superior risk-return profile of emerging market bonds reflects a new reality where the hegemony of developed markets can no longer be taken for granted,” Neiron mentioned.

“We have noticed the fiscal prudence of many international locations within the Asia, Latin America and Eastern Europe areas, which stand out for having low-inflation, steady currency environments conducive to sustainable growth. We are additionally cognisant that rising markets aren’t a monolith, and international locations which have demonstrated fiscal power traditionally aren’t resistant to financial missteps.

“Taking full advantage of the opportunities in emerging markets debt, we think, requires an unconstrained active approach, and strategies like VanEck’s active emerging markets bonds ETF provide access to this market.”