Emerging market debt as an asset class has become a more viable investment because it has become mor...
Emerging market debt as an asset class has become a more viable investment because it has become more liquid, according to Colm McDonagh, fund manager at Aberdeen.
McDonagh says the sector has performed well over the past six months and has become more diversified. 'There was a large default in Argentina last year, which was an important hurdle, but other emerging market countries have not been as affected as first thought,' he says.
According to Baring Asset Management, the Argentine crisis did not contaminate the rest of the asset class because of clear improvements in economic and political management across large parts of the emerging universe. Following the strong start to the year, emerging markets consolidated their gains in March, says Kate Munday, head of emerging markets at Barings.
'The asset class is continuing to outperform developed markets on a relative basis,' she notes. 'The US, Europe and Japan are showing signs of renewed activity. There is also the long-term secular investment case of market re-rating as emerging countries adhere to economic orthodoxy and politicians undertake reform.'
McDonagh says three things are affecting emerging market debt at the moment: the US recovery; the potential for an increase in interest rates; and the oil price. 'At the moment, there are good yields to be had,' he says. 'Oil producers have fared well in the past couple of weeks and there may be surpluses at the end of the year.'
It is generally accepted that the global recovery will be moderate. McDonagh says: 'From the end of September, there has been a good run in yields from emerging markets and we expect this to continue throughout the year. Things may change when interest rates rise and have an impact. When the global economy and interest rates stabilise, we will have a better idea.'
McDonagh is evenly split between countries in the region. He says: 'In a low interest rate environment, it is possible to get a decent yield. There are so many good areas to choose from and, if Asia has trouble, we can look at Latin America.'
Within Eastern Europe, Aberdeen likes Russia and in Latin America the group has been monitoring the Brazilian elections.
In Asia, it is more positive on the Philippines and Korea, as both regions have performed well in recent months.
McDonagh says: 'We are cautious on the Middle East and Africa for obvious reasons. Places such as Egypt are very susceptible to tourism flows and any potential military activity will alter risk perception. The ratings agencies are very positive on Russia, Brazil and the Ukraine.'
The South African rand continues to strengthen, but Munday says Barings remains negative about the country, favouring Asian markets instead.
She adds: 'We have an overweight position in Korea, which has performed strongly, helped by robust foreign direct investment and improving expectations for stronger economic growth this year.
'In Brazil, sentiment has improved, with the central bank announcing a 25 basis point interest rate cut. By contrast, Mexico was pulled lower by inflation concerns, despite an increase in its sovereign credit rating to investment grade by Standard & Poor's.'
Emerging market debt more liquid.
Improvements in economic management.
Decent yields coming through.
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