Emerging markets and selected high yield debt appear to offer opportunities in the current environment of heightened geopolitical risk, according to the summer bond market observations from Standish Mellon Asset Management Company LLC, the Boston-based fixed income boutique for BNY Mellon.
Periods of market volatility associated with this type of risk historically have provided buying opportunities, according to the Standish Bond Market Observations July/August Part II (BMO).
«Over the past two decades, investors who bought the popular global or high yield bond indexes during spikes in volatility on average ended up with positive total return six months later,» said David Leduc, chief investment officer of Standish and author of the report.
This time around, conflicts in Ukraine and Iraq have contributed to higher volatility and risk assets began to sell off, the report said. Standish expects both Ukraine and Iraq will settle into an unstable equilibrium. While both have the potential to unsettle financial markets, Standish said they believe that neither is likely to derail global economic expansion in the second half of 2014.
Looking at emerging markets, Standish said valuations appear to be particularly compelling in Latin America and Asia. However, Leduc added, «We worry about the vulnerability of the sector to the eventual tightening of Fed policy despite the improvement in market technical signals.» The improvement in technical signals followed the sell-off that occurred in the spring of 2013 when talk of tapering quantitative easing first arose, Standish said.
Overall, Standish expects the U.S. and China to lead accelerating global growth in the 2014 second half. The report cites stimulus measures implemented by China earlier in the year that are beginning to filter through to the broader economy. The report also noted that economic output in the U.S. rebounded in the second quarter of 2014.