Emerging market debt remains attractive as the soft global economic outlook continues. Dominique A...
Emerging market debt remains attractive as the soft global economic outlook continues. Dominique Audin, senior investment manager for emerging market debt at Pictet Asset Management, says the 20-year low in interest rates and downbeat economic forecasts make the high yields on emerging market bonds look attractive.
The total emerging debt market is capitalised at $1.6 trillion, representing 5% of the total world bond market, therefore making it worthy of separate consideration, according to Audin.
'Emerging market debt continues to be regarded as an increasingly acceptable vehicle for investment by institutional investors keen to find yield and a source of diversification,' she adds.
Pictet has seen strong interest in the asset class from its client base, with its Fixed Income Fund Global Emerging Debt growing from $47m to $251m under management in the 12 months to the end of March.
Audin says improving economic conditions in Latin America will continue to support emerging debt prices.
'The results achieved by Brazilian president Lula's government during its first 100 days in office have far exceeded expectations. As a result, confidence in the economy has, to a large extent, been restored and the Brazilian real has been gaining against the dollar. In response to all the positive developments, the price of the benchmark 2014 Brazilian bond has continued to rise,' she says.
The worst also seems to be over for Argentina, where the peso has been rising, the economy is expanding and a new president has been elected.
'As a result, Argentina's debt is trading at about 30%, up some five percentage points since the beginning of April,' says Audin.
Increased transparency and more timely and accurate information are also making it easier for emerging market investors to avoid bad credits.
'Long-term structural improvements have led to a decreasing intra-regional domino effect of sovereign defaults and less dependency on foreign creditors,' Audin says.
Christopher Wyke, emerging market debt product manager at Schroders, says recent investor interest is unlikely to last.
'There is an underlying structural shift of it becoming a more acceptable asset class as people understand it more and allocate more money to it. But a lot of the money allocated in recent months will move back into equities if investors are convinced there is a positive move in the stock markets,' he says. The inflow of new money in recent months has also led to unsustainable valuations in some sectors.
'Most of it has gone into the largest dollar-denominated markets, so we think some of the best opportunities at the moment are in shorting Russia and Brazil,' he says.
Both markets are overvalued and vulnerable to a setback, with Wyke believing that the Russian economy is still undeveloped and dependent on oil prices, which are expected to fall, while Brazil has unsustainable debt servicing obligations.
Local currency markets are offering better value at the moment, with Indonesia and South African bonds in particular looking attractive, he adds.
Recent increase in fund inflows.
Local currency bonds less risky.
Slow progress in improving diversity
Share purchase deal with assets of £28m
Came into effect in January
Three examples of compensation rule issues
Buying in baskets