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Patient investors are likely to be rewarded as we expect yields to rally—that is, decline—in emerging markets (EM). That’s the key finding of Higher inflation is creating an opportunity in emerging markets, an analysis produced by experts from Vanguard’s Fixed Income Group.
The authors cite two major reasons why they think the peak in EM inflation is near and why the resulting disinflation1 will create attractive buying opportunities.
Differences in goods and services consumption patterns have contributed to higher EM inflation. Recent inflation in emerging markets has been more supply driven than in developed markets. This makes EM inflation more likely to fall when supply-side pressures abate.
In general, central banks in emerging markets have been proactively hiking. And market prices anticipate a good deal of rates hikes over and above what central banks have delivered.
Notes: Data are as of 1 August 2022. Priced-in hikes reflect the difference between current policy rate and 1-year forward implied policy rate. A basis points equals 1/100 of a percentage point.
Sources: Vanguard and Bloomberg, as at 29 July 2022.
While the authors do not attempt to pinpoint the peak in inflation, they believe that local emerging markets rates are starting to look attractive.
We believe that our active fixed income teams have a strong process in place to seek opportunities in long-duration EM local bonds when the trend decisively turns, and we think that we are close to this point.
Learn more. Read Higher inflation is creating an opportunity in emerging markets.
1 Disinflation is a reduction in the rate of inflation.
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
Some funds invest in emerging markets which can be more volatile than more established markets. As a result the value of your investment may rise or fall.
Funds investing in fixed interest securities carry the risk of default on repayment and erosion of the capital value of your investment and the level of income may fluctuate. Movements in interest rates are likely to affect the capital value of fixed interest securities. Corporate bonds may provide higher yields but as such may carry greater credit risk increasing the risk of default on repayment and erosion of the capital value of your investment. The level of income may fluctuate and movements in interest rates are likely to affect the capital value of bonds.
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