Over the final weeks of March, yields widened in emerging markets bonds on the back of the equity cr...
Over the final weeks of March, yields widened in emerging markets bonds on the back of the equity crisis and the worldwide economic slowdown, according to Old Mutual.
Richard Woolnough, manager of the Old Mutual Worldwide Bond Fund, says the weakness in the Nasdaq is not a good backdrop for emerging market bonds, which are by nature a high risk, high reward asset class.
He adds: "At the moment, the bonds are at the cheaper end of the trading range because of the worldwide economic slowdown, the general flight to quality and the crises in both Turkey and Argentina."
That Turkey has devalued, says Woolnough, has hurt the asset class, as have the political spats in Argentina, which has led to poor performance and been a drag on all emerging market bonds. "The weakness in Argentina is contagious. It causes concern in the Brazilian market, which has had to increase interest rates to defend its currency," Woolnough says.
As a result, the C-Bond, the benchmark Brazilian dollar debt, fell from 81 to 75.5 on 23 March 2001, which, according to Paul Murray John, executive director of Threadneedle Emerging Market Bond fund, was a move largely generated by the concerns in Argentina.
Argentina has a fixed exchange rate with the dollar, which, Woolnough says, leaves it little flexibility. Because the US dollar is so strong at the moment, the Argentina peso is also strong causing the economy to be sluggish and struggle for growth.
Colm McDonagh, fund manager at Aberdeen Asset Management, says that Argentina makes up roughly 23% of the emerging market bond index and has in the past been seen as the golden child in the sector.
McDonagh says that, unlike Turkey, Argentina does not have the option of devaluing.
At the moment, the IMF funding programmes are helping out, but to restore confidence growth needs to be re-engineered slowly.
He says: "In Argentina, confidence has been lost because of the perceived lack of political support, the economic minister who suggested aggressive tax and expenditure cuts only lasted 10 days before he was replaced."
Murray John says that in general since the Russian crisis of the late 1990s the emerging markets have been rallying, with yields trending downwards.
Woolnough believes that, although emerging markets suffered in autumn 2000 with the worldwide economic slowdown, they held up surprising well when the Fed cut interest rates in January, which provided a rush of liquidity in the market.
Murray John says: "For the medium-term, emerging markets bonds are a good asset class, however, they have been weakened by the correction in the past two weeks, so the outlook is good but not brilliant."
In the medium-term, Murray John says there are reasons to be positive.
He adds: "The easing in US monetary policy will create liquidity and provide support for bond prices and there is a supportive demand and supply dynamic in emerging market bonds. The likely supply in 2001 is significantly less than the money being returned to investors in the form of coupon payments, the principal payments in emerging market debt."
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