EM got whipped post QE Taper discussion in May 2013. You know the story.
More recently, Brazilian Real is recovering despite S&P downgrade on sovereign debt:
This is just one example of crisis causing cleansing.
The Local Currency EM Bonds are BBB-f rated. Investment grade. The YTM is 5.77%. Long term weighted average inflation expectations (IMF) is around about 3.25% via sampling. Real yield = 2.5%pa. Effective duration 4.05yrs.
CDS spread 5yrs Aust = 45
CDS spread 5yrs Brazil = 170
CDS Spread 5yrs Mexico = 89
Flows out of the sector have been dominated by US retail:
Retail investors trade with momentum and with fear. Prices revert in bonds and volatility also reverts. When retail is buying, all things equal, the best bet seems to be to sell etc. There is a reasonable chance this is the turn...maybe
Probably pick up some decent carry vs AUD 5yr yld 3.44% not to mention potential REER reversion if riding unhedged and happy to hold.
Risks: China contagion. Increased synchronization of capital flow.
Does this look cheap vs AUD Bonds on a long term hold or what? Thoughts?
FYI, composition of Barclays Local Currency EM Bond Index: