Rush as emerging market debt offers yield and diversification

In volatile markets, many investors have headed for gold, cash or highly defensive equity holdings. But others are persuaded by the opportunities in emerging market debt.

In recent weeks, scarcely a day passes without the launch of a new emerging market bond fund, or the hiring of individuals or whole teams, to boost the capability in this sector of business-hungry investment banks and asset managers.

Product providers say they are simply meeting client demand, with investors chasing yield and ­diversification.

In turbulent times, emerging ­markets – with their positive ­economic growth, low debt levels, favourable demographics and improving corporate and ­institutional frameworks – are an understandable attraction.

Emerging market debt (EMD) has grown dramatically as an asset class over the past two decades, and is now worth as much as $10trn.

However, outstanding EMD is still only about 11% of the global bond market, while emerging economies represent 34% of global output.

John Morton, chief investment officer for fixed income at Rexiter Capital Management (which ­operates from London, Boston, Singapore and Seoul), believes EMD is set to be the best performing asset class over the medium term, supported by the shift in economic strength from the developed to developing nations and the end of an established global economic model following the 2008 crisis.

Emerging markets proved more resilient in 2008. But the then ­fashionable theory of de-coupling, which held that emerging markets worked differently from developed markets, was tested and found wanting.

Most emerging markets followed mature markets into ­slowdown, if not recession.

Yet Sally Greig, co-manager of Baillie Gifford’s Emerging Market Bond fund (launched in the summer of 2008), believes emerging market bond markets have finally come of age. Simon Lue-Fong, head of emerging market debt at Pictet Asset Management, agrees.

“People naturally want anything that looks good, and it is good for a reason,” he notes. “Does the good news get overpriced? Yes, there may be a danger of that, but we are some way from that point.”

With a 15-year track record in the sector and nearly £20bn assets under management, he sees the EMD sector growing rapidly in size, if not liquidity.

“You have to accept for the moment that there are fewer banks in the emerging sector and credit limits may be smaller.

So liquidity is not yet as good as developed markets. But it has come a long way, and there is no going back.”

There is also a reasonable balance of supply and demand, with a steady stream of issues taken up by newly wealthy investors in emerging economies, as well as those from developed markets.



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