Upgraded EM debt causes shift in asset allocation, says Legg Mason

Ian Edmonds, lead manager on the Legg Mason Global Multi Strategy Fund, says that there is an asset allocation shift towards emerging market debt following recent credit rating upgrades.

We think the global market is experiencing a convergence of ratings. We’re constantly getting downgrades by the agencies in the developed world while within emerging markets we’re getting a trend of upgrades.

From a structural point of view, we believe there is an asset allocation shift going on from investors, pension funds and sovereign wealth funds into emerging market debt.

Given the contrast in credit ratings between developed and emerging markets, we think the best way to play that is through a combination of sovereign debt, emerging corporates – where you get more spreads – and also select local markets such as Latin America and Asia. We believe that over time, emerging market currencies will appreciate against the G4 currencies.

Growth

We are looking for around 8% coming from China. Latin America is growing quite nicely and we expect a 2-3% growth range from the US. We think the inflation pressures within emerging markets will subside and that the policy makers in these regions have the tools to ease this further.

Brazil has one of the highest real yields in the emerging market world, so we continue to like that country. The currency has done very well recently, so we think the rate of appreciation there will probably slow down.

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