In the emerging markets fixed interest arena, Eastern Europe is performing well, however, Latin Amer...
In the emerging markets fixed interest arena, Eastern Europe is performing well, however, Latin America is still faced with political and debt problems.
Jerome Booth, head of research at Ashmore, says: 'Emerging markets fixed interest has done very well as spreads have not narrowed.'
Helene Williamson, director of emerging markets fixed income at Foreign & Colonial, says: 'Emerging markets fixed income markets have had good performance of between 5% and 7% for the first six months of the year.
'The most important thing in this area has been the change in investor base. Speculative money never really came back after the devaluation of Russia and the spreads have remained high,' adds Booth.
In Russia, international reserves are going up, tax revenue has increased by 70%, strong oil prices and spreads, while relatively high, have dropped below 1,000 basis points. Russia's payment capacity is a lot better than it use to be.
The high oil prices have helped countries like Russia. Williamson says: 'The most positive impact on emerging market fixed interest has been high oil prices. It was originally forecast at $22, but is currently at $26.'
However, Booth says there is some concern that these high oil prices will fall.
Williamson is also positive about Bulgaria in Eastern Europe because it has relative high spreads and credit is improving.
Booth says large US institutions are now looking to diversify their holdings and are investing part of their pension funds in emerging market debt to reduce volatility in their portfolio.
New indices in emerging market debt also could lead to more money being invested. The Lehman Aggregate is being replaced by more diverse indices such as the Lehman Universal that has increased the weighting of emerging market debt to 4%.
However, Argentina, Brazil and Turkey are areas of concern for emerging market debt. In Turkey, the fact that the IMF has postponed a board meeting to discuss debt problems is having a negative impact on the country. Brazil's currency has weakened, causing concern for the fixed interest market. Argentina is a major concern because it is politically unstable.
Although in Latin America there is a lot of risk, Williamson believes it is important to watch the developments of these countries. She says: 'A lot of the risk has been priced in, but in the emerging markets it is hard to make any long-term forecasts. It really depends on the country.'
Booth believes Asian fixed interest markets are starting to perform well as a lot of debt in these countries is distressed. Liquidity is increasing domestically and there is a lot of value.
Fund manager comment: Standard Life
We have been positive for the outlook for sterling credit since last summer. Spreads have come down a long way since. However, there are warning signs that further immediate progress may be difficult ' AAA rated bonds have got stuck at low spread levels, investment grade bonds generally are starting to see significant issuance in sterling and markets overseas are giving cause for concern.
When we forecast general sterling credit spread levels, we look at two things ' swap spreads and the issuance calendar. Our swaps model indicates that for current monetary conditions, swaps are fair value. However, in the short term we can see influences which could push spreads higher, sharply deteriorating interest rate expectations..
Eurosterling issuance has picked up sharply in 2Q 2001 ' some £5bn ahead of the seasonal pattern established over the last few years. The composition of issuance has moved away from AAA borrowers to securitisations, industrials and financials corporate bonds. Investors are buying more risk.
In the US, worries about default and the state of the economy have been pushing corporate spreads higher for some time. Emerging market spreads have proven resilient to this so far, but further upward dollar momentum could provoke a crisis in Argentina and consequently damage emerging market debt. Sterling credit markets have outperformed dollar and euro markets due to strong domestic demand but if issuance does increase, we could see a sharp correction as the UK takes a reality check and catches up with events overseas.
Andrew Sutherland is investment director of fixed interest at Standard Life Investments
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