Search for Yield:

Is the grass greener on the other side?

In the search for yield, the risk premiums on lots of bond categories have simply vanished. Is there a region with a decent return on bonds? Does potential additional risk outweigh the (expected) extra return?

Europe in perspective

At the moment, the so called ‘safe’ investments are guaranteed to generate losses. The return on Dutch government bonds is negative for all durations up till 15 years.

If investors in the eurozone are willing to take a bit more of a risk, they could consider Irish, Spanish or Italian government bonds. These countries offer positive returns (before taking into account inflation: monetary depreciation due to rising prices).

Figure 1: BVAL-curves Spain, Netherlands, Italy and Ireland

BVAL = Bloomberg Valuation Service

Source: Bloomberg Finance L.P., 4 December 2019

Professional investors like to look at the additional return on an investment over and above the ‘risk-free interest rate’. Long-term investors need to ask themselves whether there is any such thing as risk-free interest rate. For the eurozone, the focus is generally on the interest rate of German government bonds. An intriguing choice, because this country actually went bankrupt twice in the past hundred years. Since 1800, Germany has been in default longer than Italy or France.

Figure 2: Italy premium less impressive outside Europe

Source: ACTIAM, December 2019

History teaches us that nothing is certain. This is the number one reason for diversifying investment portfolios. It seems fairly easy to diversify in Europe. However after two world wars we may well ask ourselves whether spreading risks over neighbouring countries provides enough risk reduction.

According to a BlackRock study (see Figure 3), there is still an underlying risk of the eurozone collapsing. Spreading risks across continents therefore definitely has advantages.

Figure 3: The European project is under pressure

Source: BlackRock Investment Institute, with data from Refinitiv.

Data as of December 5, 2019.

Notes: We identify specific words related to geopolitical risk in general and to our top-10 risks. We then use text analysis to calculate the frequency of their appearance in the Refinitiv Broker Report and Dow Jones Global Newswire databases as well as on Twitter. We then adjust for whether the language reflects positive or negative sentiment, and assign a score. A zero score represents the average BGRI level over its history from 2003 up to that point in time. A score of one means the BGRI level is one standard deviation above the average. We weigh recent readings more heavily in calculating the average

Furthermore, risk premiums for government bonds overall decreased in 2019. In particular, the premium for entrusting funds to the Italian government fell sharply. At the start of 2019, the risk premium for Italy was at about the same level as that for BBB emerging markets. But this is no longer the case.

Figure 4: Italy premium highest in Europe

Source: ACTIAM, December 2019

Earning capacity and governance quality are key

Wie naaInvestors looking for diversification as well as yield will quickly find themselves looking at emerging markets. Are these countries suitable for diversifying risks and generating returns? st spreiding ook enig rendement zoekt, komt daarmee al snel bij ‘opkomende markten’ uit. Maar zijn deze landen geschikt om risico te spreiden en rendement te genereren? En hoe verhoudt dit zich bijvoorbeeld tot beleggingen in Italiaanse staatsobligaties?

Currently, there are 20 countries (with a population of more than 0.5 million inhabitants) issuing government bonds in strong currencies (EUR, USD) with a rating comparable to that of Italy. This involves 9 countries in Europe, 3 in Asia and 8 in Latin America. These countries comply with our socio-ethical investment principles, called our Fundamental Investment Principles. These define the bottom-line of our investments. Companies and countries not complying with these principles are considered to exhibit unacceptable behaviour.

Figure 5: Partially applying Fitch rating scorecard

Figure 5: Partially applying Fitch rating scorecardComparison of partial score on debt and interest, as well as on score on all economic indicators

Source: ACTIAM calculations based on Fitch method (May 2019) and IMF data

The chance of the hassle-free payment of coupon (interest) and principal is highly dependent on a country’s debt level and governance quality. Government bonds of countries with higher debts in relation to their earning capacity are a riskier investment. Countries with poor governance are also more risky. Let’s make a comparison between European countries and Emerging Markets.

Governance quality

Countries in the eurozone are considered to have a better governance compared to that of emerging markets. Countries such as Uruguay and Chile, however, clearly have better governance than Greece and Italy, for example. Figure 6 shows the rankings based on the World Bank governance indicators. This data is being used by the rating agencies based on 6 indicators and 4 subtopics. ance quality.

These sub-scores look at the reality and quality of the country’s governance, but not at how democratic it is, or the level of unrest that exists. These are part of the overall score, though:


  • Control of Corruption
  • Government Effectiveness
  • Political Stability and Absence of Violence/Terrorism
  • Rule of Law
  • Regulatory Quality
  • Voice and Accountability


  • Estimate
  • Number of Sources
  • Percentile Rank
  • Standard Error

Figure 6 shows that, although Chile and Malaysia are somewhat less peaceful and less democratic than Portugal or Poland, their governance is better.

Figure 6: Stability versus Governance quality

Source: ACTIAM calculations with WorldBank Governance Indicators

Earning capacity

In assessing the debt level, we need to look not only at the present earning capacity of a country, but also at its future earning capacity as well. It is harder for nations with a rapidly ageing population to bear their debt than it is for countries with a relatively young population. Countries which have a relatively old population spend more on pensions and healthcare compared to those of working age.

Figure 7: Working age population growth (25-60) from 2015-2030

Source: ACTIAM calculations based on UN Population Division, population projections, medium variant.

As stated before, we focus on government bonds in strong currencies (EUR, USD) rather than local currency. Therefore, it is necessary also to look at the capacity of these countries to earn foreign currency. For instance, countries with high net export figures and substantial currency reserves are in a better position to bear foreign debt. Rating agencies have specific parameters for this. S&P for instance uses the ratio of net external liabilities to current account receipts. Lastly, future earning capacity is largely determined by the quality of the education system. For this, we look at the PISA scores (Program for International Student Assessment, a large-scale international comparative study conducted under the auspices of the OECD). If we combine all these factors, we see the following in relation to the earnings capacity (see figure 8, 9).

Beeld (toekomstige) verdiencapaciteit

Source: ACTIAM calculations based on Fitch method (May 2019) and IMF data


So far, we have mainly looked at the more common indications such as the payment capacity of the different countries. In addition to the search for returns, many investors are also working on making their investment portfolio more sustainable.

Figure 10 compares the aforementioned risk score for government debt against an index that looks at the extent to which countries take into account the so-called Sustainable Development Goals (SDGs). These sustainable development goals cover various aspects of an honest, safe, climate-friendly, prosperous and healthy life within the ecological capacity of the planet. A comment that must be made here is that it concerns so many different aspects that the total scores say less than if we look more in detail at the sub scores.

Figure 11 shows that there are countries that both achieve overall prosperity and stay reasonably within the planetary boundaries. To determine the level of prosperity, we do not look at per capita income, but rather at issues such as poverty, malnutrition, gender equality, access to education and health care as well as access to clean water and electricity.

The 'respect for the planetary boundaries' is determined on the basis of sub scores for overfishing, natural resources and endangered species, household waste, the contribution to climate issues (in particular CO2 emissions), air quality and the overloading of the soil through excessive nitrogen deposition.

Figure 12 shows that many emerging market countries are little inferior to Western countries when it comes to providing social prosperity or taking a greater hold on the planet's capacity.


Investing in emerging markets is often seen as risky by many investors. Often investments are made in the so-called "safer" countries close to home. But is this a correct conclusion? If we look at the governance quality and earning capacity of countries, then certain emerging countries score better than countries within the European Union. In the search for returns in combination with creating social impact, we can see that the grass of emerging countries is sometimes greener than that of European countries.


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