Provided investors steer clear of Latin American credit, emerging market debt remains attractive, ac...
Provided investors steer clear of Latin American credit, emerging market debt remains attractive, according to Simon Lue-Fong, emerging markets debt manager at Invesco.
Lue-Fong said: 'Latin America has dominated emerging bond markets for the past 18 months, first because of the Argentine default and then because of economic and political concerns in Brazil.'
Bond spreads have widened, but nowhere more so than for Latin America. Brazilian and Venezuelan 10-year bonds, for example, recently traded at about 2,300 basis points and 1,100 basis points over US Treasuries respectively, he noted. But while investors are cautious about Latin America during a period of risk-aversion, emerging-market yield spreads compensate investors for the risk of default.
Still, he said, investors should not let the focus on Latin America mask the attractiveness of the asset class. 'During the Russian default of 1998, investors indiscriminately sold emerging market debt, although unrelated regions were still paying coupons and had no intention of defaulting,' he said. 'The asset class has, however, matured in recent years. Asian and European emerging countries have decoupled from Latin America, supported by stable politics, favourable economic policies and high savings rates.'
So far in 2002, Russia has returned about 20% and it may well be upgraded to investment-grade status in the next three years. At the same time, Bulgaria and Romania continue to perform well as their economies converge with Western Europe.
'Likewise in Asia, bonds have been stable, supported by high savings ratios, although yields tend to be lower. South Africa has also performed strongly, returning 17% in 2002 while enjoying favourable reviews from rating agencies.'
However, he warned that fund management in the asset class requires an asset allocation approach by country and region. He said: 'Investors who have been underweight in Latin America and individual countries such as Turkey, which is over-indebted, would have achieved returns well in excess of the Index.'
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