By Dylan Emery Credit Suisse Asset Management will launch an emerging Europe bond fund in September....
By Dylan Emery
Credit Suisse Asset Management will launch an emerging Europe bond fund in September.
It will be aimed at both institutional and retail investors and will try to take advantage of the yield spreads between emerging European sovereign and corporate debt and their mainstream counterparts.
The fund, run by Jana Benesova, will buy both local and mainstream international currency products and will attempt to profit from falling yields as Eastern European countries join the wave of EU convergence stories.
The portfolio will consist of mostly government bonds, with 15%-20% of the fund comprising corporate bonds, chosen after examination of the underlying health of the economy. Benesova believes there is an inconsistency between the yields being offered by companies.
A company in Spain might offer a lower yield than a similar company with much better fundamentals in Poland. Finding bond issues like this gives Benesova the opportunity to add value while lowering risk.
Some emerging European governments are arguably less likely to default. Greece, for example, already has a 125% debt to GDP ratio, whereas the average debt to GDP ratio for countries such as Poland and Hungary is 35%-40%. Unlike Greece, these countries meet the demands of the Maastricht criteria, which caps government debt at 60% of GDP.
There is plenty of space in the market as well. So far Central Europe has not had to rely so much on the issuance of debt but the area has received $85-90bn. Furthermore, emerging European countries have generally slowed down to the EU rate of growth, so while Spain has a GDP rate of 3%, Poland has one of 6%.
Most of the fund will be invested in four core countries - Poland, Hungary, the Czech Republic and Slovakia. Benesova is positive on these countries for the long-term. The rest will go into less developed countries like Estonia, Latvia, and Bulgaria.
She thinks that, with French and German approval, European expansion is inevitable. The only question is how quickly the current EU members are prepared to push the process.
As the core countries enter the fold, spreads will diminish and the fund will push out to countries that are further behind the curve, she said.
The purpose of the fund is to provide an investment that has little correlation with mainstream bond markets.
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