Eurozone volatility may create ETF buying opportunities

May 30th, 2012 | By | Category: Fixed Income

Volatility related to political and economic uncertainty in Europe may create buying opportunities in US corporate credit and emerging market debt, according to a report issued by Standish Mellon Asset Management, part of BNY Mellon.

Eurozone volatility may create ETF buying opportunities

Uncertainty arising from the eurozone crisis could create opportunities to buy attractively valued US corporate credit and emerging market sovereign bonds, reckons Thomas D. Higgins, global macro strategist at Standish.

The global recovery, now in its third year, is expected to continue, despite the issues in Europe, according to the report.  The risks of a Greek departure from the euro may have increased, but European policy makers will likely take action to prevent this from occurring in the short term, believes Standish.

“The good news is the global economy probably is better positioned for a Greek exit from the euro than it has been in at any time in the last two years,” said Thomas D. Higgins, global macro strategist for Standish and the author of the report. “But, we expect the political and economic uncertainty in Europe to lead to further volatility in the financial markets, particularly in the summer months when liquidity dries up.”

FEATURED PRODUCTS

London-listed Emerging Market sovereign /
government bond ETFs:

iShares Barclays Capital Emerging Market
Local Govt Bond ETF (SEML)

SPDR Barclays Capital Emerging Markets
Local Bond ETF (EMDL)

Lyxor ETF iBoxx $ Liquid Emerging Markets
Sovereigns (LEMB)

Pimco EM Advantage Local Bond Index Source
ETF (EMLB)

London-listed US corporate bond ETFs:

– iShares Markit iBoxx $ Corporate Bond ETF
(LQDE)

– Pimco Short-Term High Yield Corporate
Bond Index Source ETF(STHY)

Standish remains cautious on European corporate debt and peripheral European government debt.  The election of anti-austerity political parties in Greece raises the probability of the country leaving the euro, according to the report.  However, the reintroduction of a separate Greek currency is likely to lead to immediate devaluation, debt default, capital flight and a collapse of the banking system, all of which may lead to worsening conditions.

Standish also is concerned about possible contagion of Greece’s problems to other peripheral European countries.  In contrast, economic fundamentals in the US and emerging markets support current valuations for US credit and emerging market debt, the report said.

“Overall, we expect the economic divergence between Europe and the rest of the global economy to continue,” said Higgins.  “During periods of high uncertainty that could arise because of eurozone issues, we believe there could be buying opportunities for US corporate credit and emerging market sovereign bonds, which appear to have attractive fundamentals.”

For investors looking to gain exposure to US corporate credit and emerging market sovereign bonds, the following London-listed ETFs provide efficient access:

Emerging market sovereign/government bond ETFs

iShares Barclays Capital Emerging Market Local Govt Bond ETF (SEML)
Tracks the Barclays Capital Emerging Markets Local Currency Core Government Index. Offers diversified exposure to local currency government debt from circa eight emerging market countries. Physically backed, sampled replication. London (LSE) listed. TER 0.50%.

SPDR Barclays Capital Emerging Markets Local Bond ETF (EMDL)
Tracks the Barclays Capital Emerging Markets Local Currency Liquid Government Index. Offers diversified exposure to local currency government debt of over 17 emerging market countries. Physically backed, sampled replication. London (LSE) listed. TER 0.55%.

Lyxor ETF iBoxx $ Liquid Emerging Markets Sovereigns (LEMB)
Tracks the Markit iBoxx USD Liquid Emerging Markets Sovereigns index comprising some of the most liquid bonds from the Markit iBoxx USD Emerging Markets Sovereigns index. Offers diversified exposure to local currency government debt of circa 20 emerging market countries. Synthetic, swap-based replication. Fully collateralised. London (LSE) listed. TER 0.30%.

Pimco EM Advantage Local Bond Index Source ETF (EMLB)
Tracks the GDP-weighted PIMCO Emerging Markets Advantage Local Currency Bond Index. Offers diversified exposure to emerging market government local currency debt that is representative of the countries driving emerging markets growth, including key markets such as China and India. Physically backed, sampled (‘smart passive’) replication. London (LSE) listed. TER 0.60%.

US corporate bond ETFs

iShares Markit iBoxx $ Corporate Bond ETF (LQDE)
Tracks the Markit iBoxx $ Liquid Investment Grade Top 30 Index. Offers diversified exposure to the 30 largest and most liquid US dollar-denominated corporate bonds with investment grade rating, 75% of which are US corporates, including 8 of the top ten holdings. Physically backed, sampled replication. London (LSE) listed. TER 0.20%.

Pimco Short-Term High Yield Corporate Bond Index Source ETF(STHY)
Tracks the BofA Merrill Lynch 0-5 Year US High Yield Constrained Index. Offers diversified exposure to the short-maturity segment of the US high-yield corporate bond market. Physically backed, optimised replication. London (LSE) listed. TER 0.55%.

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