The global market rout is nearing its peak and the U.S. treasury bonds are drawing attention with investors seeking refuge to safe havens. However, this strategy earns investors safety in their portfolio but deprives them of high yields.
Previously, emerging market currency bonds and the related ETFs were shelters for investors seeking juicy yields as well as relatively higher protection to capital gains. But they seem to have lost their appeal now.
There are a plenty of reasons that are pushing this investing arena out of favor. Below we highlight what’s spoiling the fervor in emerging market currency bond ETF investing and marring its safe haven appeal.
Why A Risky Bet Now?
Stronger Dollar: First of all, several emerging market currencies have been facing tough times in recent months and stacking up losses due to a still strong U.S. dollar. WisdomTree Emerging Currency Strategy ETF (CEW), which measures changes in the value of emerging market currencies relative to the U.S. dollar, is down over 10% this year and lost 8.8% in the last three months (as of September 9, 2015).
The speculation for the Fed lift-off has never been as strong as it is this time around. Though U.S. job numbers in August grew at the most sluggish pace in 5 months and fell short of analysts’ expectation, this might not deter the Fed from finally hiking the rate. This has made the greenback a king of currency that has weighed heavily on a basket of emerging market currencies, be it across Asia, or Latin America.
Slumping Commodities: Many emerging market nations are commodity-rich. As a result, a broader commodity market swoon on supply glut, lower demand on global growth worries and a strong greenback wrecked havoc on currencies of commodity-focused economies including Russia, Brazil and Columbia.
This was truer given the oil price crash over more than the last one-year period which has wrecked havoc on oil-oriented emerging economies like Russia and Columbia. This also dealt a blow to the emerging market currencies (read: 2 Emerging Market Currency ETFs Crushed by Oil Rout).
China-Induced Global Market Rout: Upheaval in the Chinese economy and the stock market crushed the global market in August and it is still not out of woods. This episode sent shockwaves to other emerging markets, making the economic health of the entire EM bloc questionable.
Impact on Emerging Market Currencies
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