After nearly a two-year bust, the emerging bond market has bounced back and is now looking like a lu...
After nearly a two-year bust, the emerging bond market has bounced back and is now looking like a lucrative investment. The market is expected to rally next year.
Julian Adams, head of emerging market debt at Aberdeen Asset Management, says: 'The market has been spooked by the global recession and the Argentinian crisis. Now these are out the way, the market has turned bullish. The spread on emerging bonds is currently at 800 basis points over treasuries so investors are looking at interest of around 13% in a 2% global environment.'
The struggling Argentinian economy has been a problem area for some years, however with the Argentinian government's recent step of trading the economy's foreign debt for local debt, it leaves a spot in the JP Morgan MBS index. It is thought Russia and Brazil will have more exposure in the index.
Adams explains: 'Argentina sold pesos at a discount to the US dollar and exchanged a vast amount of foreign debt for local bonds, decreasing the emerging market index by 20%. Brazil, Mexico and Russia will take up the percentage Argentina has given up which will drive the index forward.'
The market is positive on the emerging debt market. According to Jerome Booth, head of research at Ashmore Investment Management, the market has undergone some changes since 1998.
He explains: 'The situation has been different since 1998. There has been a change in investor base. Previously, the market was marked by speculative investors, but in 1998 with the Russian crisis, margin calls were hit and they were forced to sell bonds in other markets such as Brazil to make up it, causing contagion.
'After that incident, speculative investors left the emerging debt market. This has been a blessing in disguise since it has made the market less volatile and reduced the contagion impact.'
The flight of speculative investors reduces oscillation in market performance with a lower chance of a contagion across to other healthier parts of the market.
'There is no reason for a contagion when it comes to emerging markets,' says Booth. 'There is very little correlation between these markets. The only reason for other emerging bonds to be affected is due to global investor behaviour.
'The markets that will do well are Brazil because its assets are oversold and Mexico which depends on the upgrade from Standard & Poor's. The best emerging debt market for next year will be Russia, where we are expecting returns to be well above 50%, and the best performing region will be Asia. Across South-East Asia and Korea, there has been restructuring to dollar-denominated debt and while other sectors are linked to the global economy, the restructuring debts are not,' he adds.
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