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There are good reasons to invest in emerging markets — despite higher rates and oil prices, says bond strategist

  • It may appear that emerging markets are on the losing end when the U.S. Federal Reserve raises interest rates and when oil prices climb, but that's not necessarily the case.
  • But the growth story in emerging markets is one that cannot be ignored, Gareth Nicholson, head of fixed income at Bank of Singapore

Emerging markets look like they could be at the losing end when the U.S. Federal Reserve raises interest rates and when oil prices climb, but there are still enough reasons to invest in bonds from developing countries, Bank of Singapore said Thursday.

Rising interest rates make it harder for governments and companies in emerging markets to service their debt, especially those denominated in the U.S. dollar. Such a situation could result in investors pulling out of developing countries to seek higher returns in the U.S.

But the growth story in emerging markets is one that cannot be ignored, Gareth Nicholson, head of fixed income at Bank of Singapore, told CNBC's "Capital Connection."

"Yes, it's going to be volatile, but you mustn't underestimate the growth in (emerging markets) at the moment," he said, noting that organizations such as the World Bank and Asian Development Bank have lifted their growth forecasts for those markets.

Nicholson argued that the Fed will not raise rates aggressively — creating a situation that many emerging nations can handle.

Oil prices, while climbing, won't go up very quickly either, he predicted, so the negative effect on those markets will be limited.

A tourist guide holds an umbrella featuring a panda pattern in front of Tiananmen Gate in Beijing, China.
Guang Niu | Getty Images
A tourist guide holds an umbrella featuring a panda pattern in front of Tiananmen Gate in Beijing, China.

The best-performing emerging market at the moment appears to be China, he said. The world's second-largest economy this week reported first-quarter growth of 6.8 percent — exceeding expectations of a 6.7 percent expansion.

Concerning the possibility that trade tensions with the U.S. will hit China's growth, Nicholson said there's reason to believe that President Donald Trump will soon wind down his rhetoric as he turns his attention to North Korea.

"One of the big things he's got to concentrate on is North Korea, and for North Korea, he needs China's support, so we think there's going to be a bit of a pull back from there," he said.