Despite Argentina's dramatic currency crisis, it has been the top-performing country within the emer...
Despite Argentina's dramatic currency crisis, it has been the top-performing country within the emerging markets sovereign debt class.
Argentine sovereign debt has risen 10% against the US dollar this year, according to fund managers, and its impact on the rest of the region has been much lower than expected.
Colm McDonagh, fund manager at Aberdeen Asset Management, says Argentina has not been the disaster many predicted.
He says: 'I think the crisis in Argentina has had much less contagion than people feared. Although the Argentines have enormous political and economic problems, contagion did not spread to other credits in the same way it did after the Russian default. Our market has matured since then and investors are more aware of the credit differentiation between, say, Mexico, Argentina and Russia than was once the case. Argentina is only irrelevant in that it no longer represents a large part of the bond index.
'The market has performed well since the beginning of the year and concerns over Argentina are less relevant than the nature of the US recovery, the appetite for credit risk in the light of recent corporate news in the US and the geopolitical implications of Bush's statements of intent.'
McDonagh says there is a large improvement in credit quality in the sector and cites Mexico's full investment grade rating as an example. He says portfolio allocations to the sector are increasing significantly not least since the shadow Argentina cast in 2001 has been lifted. He says: 'We still think the outlook is very positive. Yields are high and credits are improving in a low interest rate environment. We think Brazil and Ecuador look very attractive in Latin America, while Russia and parts of Asia will continue to outperform.'
Manager of the £95m Threadneedle Emerging Markets Bond Oeic, Paul Murray-John, reports his portfolio was up 14% in 2001, despite avoiding Argentinian debt.
'It has moved up 10%,' he says. 'Because most institutional investors saw the disaster coming, the market over compensated and, when it actually happened, there was no one left to sell.'
With a focus on sovereign debt, Murray-John favours Russia and Mexico. He says: 'We are overweight Russia because we think the oil price will remain at these levels or higher for the medium term. This is good news for the country because it helps the budget position and economic growth outlook.
'Even if the oil price were to fall further, there is room in the budget to tighten policies and counteract its impact on the economy.'
Russia is doing all the right things at home as well as strengthening its relationship with the US, according to Murray-John.
On Mexico, he says: 'That country is expensive but I think yields can fall even more because it has recently received investment grade rankings from both of the major rating agencies, Standard & Poor's and Moodys.
'This has opened up Mexico to a much greater investment universe.'
Fallout from Argentine crisis has been muted.
Mexican yields have scope to fall further.
Russian debt benefiting from high oil prices.
Asian markets look expensive.
Some Latin American countries overvalued.
Oil prices may begin to fall.
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