New research from VanEck has highlighted a common misconception that could be short-changing Australian investors.
The report, Emerging Strength: Why EM bonds are the future of fixed income, revealed the surprising strength of bonds from emerging market economies and how they have outperformed their developed market counterparts.
This strength is reflected in the performance of both passive and active exchange-traded funds (ETF) across the fixed income and credit spectrum, according to VanEck.
Emerging market bonds have beaten Australian hybrids, subordinated debt and corporate bonds – often seen as the highest-yielding debt securities – to become the top-performing fixed income asset class in Australia over one year and three years.
While emerging markets have long been viewed as “riskier” for investors, VanEck’s analysis, based on the Efficient Frontier framework and Sharpe ratio, has shown that an allocation to emerging market bonds can help investors optimise their fixed income portfolios for better risk-adjusted returns.
Arian Neiron, chief executive officer of VanEck Asia Pacific, said: “2025 has been marked by mass upheaval, and investors are having to challenge some long-held perceptions.”
“The outperformance of emerging market bonds is not a new phenomenon, however, geopolitical developments this year have brought alternative exposures into greater focus.
“To many, emerging markets are synonymous with perceived risk due to several crises in Latin America, Asia and Russia throughout the ’80s and ’90s,” Neiron said.
Although the crises that once shaped perceptions of emerging markets occurred decades ago, they continue to influence investor sentiment, according to Neiron.
He noted the irony that characteristics typically associated with emerging markets – such as high government debt, large budget deficits and loose monetary policy – are now more accurately seen in developed economies, particularly in light of rising US debt.
Neiron said the stronger risk-return profile of emerging market bonds highlights a shift in the global financial order, where the dominance of developed markets can no longer be assumed.
“The superior risk-return profile of emerging market bonds reflects a new reality where the hegemony of developed markets can no longer be taken for granted,” he added.
“We have observed the fiscal prudence of many countries in the Asia, Latin America and eastern Europe regions, which stand out for having low-inflation, stable currency environments conducive to sustainable growth.”
Neiron further stated that countries that have demonstrated fiscal strength are historically not immune to “monetary missteps”, adding that VanEck is conscious that emerging markets “are not a monolith”.
“Taking full advantage of the opportunities in emerging markets debt, we think, requires an unconstrained active approach, and strategies like VanEck’s active emerging markets bonds ETF provide access to this market,” he said.
