Emerging market debt has managed to outperform almost every other asset class in the first quarter o...
Emerging market debt has managed to outperform almost every other asset class in the first quarter of the year and the future looks bright.
Increasing sophistication of emerging markets investors means volatility is reducing, while performance remains good, according to Abigail McKenna, who runs several Morgan Stanley emerging markets debt programmes, including a Sicav.
Her Sicav is long-only and invests primarily in the hard-currency denominated government bonds of around 30-35 countries.
McKenna claims that, due to the inefficiencies in the market, emerging fund managers have on average added alpha to their portfolios ' 100-300 basis points in the long term.
'In the past, people have been suspicious of emerging markets ' they thought corporate governance was a joke and transparency didn't exist,' she said.
'The WorldCom/Enron affairs have shown it isn't confined to emerging markets. At least em-erging market investors expect some problems to occur, which has helped reduce volatility.'
Also, the International Monetary Fund has forced a few countries to update their economic systems since the Asia crisis.
Since 1998, emerging market sovereign debt has become much less volatile ' it has offered fixed income volatility with equity-like returns, said McKenna.
Investors in emerging debt products come from different areas, from domestic institutions to hedge funds. Experience has taught them not to group all of their emerging investments together when there is a fall.
McKenna said: 'There is a risk premium that is good for investors. Sector changes mean volatility will come down and as investors get used to the lower volatility, they'll be more constant. So emerging market debt could benefit strongly in the next few years.'
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