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Emerging market bonds could perform particularly well in a low interest rate environment, and an Aberdeen Standard Investments badyst has chosen three countries that he likes – and one that he does not prefer.
Central banks, especially in emerging markets, have been in easing mode, inspiring a dovish Fed. The testimony prepared Wednesday by Federal Reserve Chairman Jerome Powell also appeared to confirm expectations of a future rate cut.
Bond prices rise when interest rates fall because investors will seek higher returns in the form of bonds previously issued – which involved higher interest rates. In addition, emerging market fixed income securities generally offer higher returns than developed markets.
"We have sort of been in the Goldilocks era for emerging markets," said Brett Diment, head of global debt for emerging markets at Aberdeen Standard Investments.
"A slowdown in growth means a drop in interest rates in developed markets," he said. While growth in emerging markets is decent, inflation is falling, which could cause central banks to lower rates, said Diment.
"In the context of what, hopefully, will be a kind of resolution between the US and China, it's a pretty good backdrop for emerging-market fixed income," said Diment to CNBC in "Street Signs".
By weighing on different markets, he said that Brazil was one of his favorite choices in Latin America. The country is trying to delay the retirement age. If successful, this would reduce the government's social security spending and reduce its deficit, which could boost confidence in the market.
Diment also appreciated short-term, but not long-term, bonds in South Africa. "Growth has been fairly weak in South Africa, so they could be cutting rates," he said, noting that the economy had contracted in the first quarter of 2019.
Russia could also be a good choice, he said. The Russian government has been "very cautious" in terms of borrowing, he said, adding: "A very good market for bonds, but the market has already performed relatively well."
Finally, Diment said that he was cautious about Turkey, citing tensions in the country. Turkish President Tayyip Erdogan is said to have dismissed the governor of the central bank for refusing the government's repeated demands for lower rates.
When asked if investors could hope that things would improve after the local elections – in which Erdogan had a hard blow, he replied: "Not in the short term, not in the medium term" .
– Reuters contributed to this report.
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