Emerging market debt: Broadening horizons
Despite continuously low yields German investors do love bonds. According to the latest data by German Investment Funds Association BVI, fixed income continues to be the second most popular asset class in the country, with total assets of some €196.4bn as of June 2016. But with Bunds overwhelmingly offering negative yields, German investors are now increasingly forced to broaden their horizons and consider emerging market debt.
With central bank interventions likely to increase in the aftermath of the British referendum to leave the EU, dollar denominated emerging market debt reported record inflows of $3.2bn in the first week of July alone, according to Deutsche Bank data. Moreover, since the beginning of this year the JPM EMBIG Diversified Index, an emerging market sovereign debt index published by JP Morgan, has increased by 12.4% in dollar terms.
This change in attitude is also reflected in ETF flows. As of July 2016, while emerging market equities turned out to be the second most popular asset class among European investors, attracting €1.3bn, according to Lipper data, emerging market bonds also gained traction, reporting more than €800m in inflows.
For Michael Hasenstab, CIO Global Macro at Franklin Templeton and manager of the group’s €18.9bn flagship Global Bond Fund, known for his contrarian bets, emerging markets have learnt their lessons from past crises. He argues that policymakers in particular have adjusted their strategies, for example by relying less on short-term debt, as in the case of Mexico. Consequently, Mexican, Korean and Malaysian government bonds are now among the biggest positions in his portfolio.
While the recovering emerging markets should be understood in the context of a three-year stagnation that preceded it, initial responses among investors in Germany suggest that appetite for emerging markets is catching up.
SwissLife Germany Vertriebsservice in Hannover continues to have a moderately cautious risk outlook for their retail clients, but it has added exposure to emerging and even frontier markets as part of its core satellite strategy, with multi-asset funds representing the core, and thematic funds, focusing for example on frontier markets, the periphery, as Felix Müller, director Product Management Investment explains.
“We don’t aim to time the market, instead, we focus on selecting active managers who would be able to make the call when they, for example, think that Iran is now a county worth investing in,” explains Müller.“In some cases, these frontier market funds have been a very welcome adjustment to our client’s portfolios,” he adds.
Jörg Baumhöfner, prokurist Private Banking at Bremer Kreditbank adds: “In the current low-yield environment and with generally careful clients, it is definitely worth reconsidering our allocation.”
“Generally, we don’t exclude countries from our investment horizon although we don’t invest in derivatives and temporarily opt out of certain sectors such as financials. We are trying to stay clear of bonds offering negative yields. In this context, emerging market debt becomes definitely more interesting; India, Russia and China are three countries we are particularly interested in. ”
Another example includes the Bremer Landesbank, which has capitalised on the growing interest in emerging markets by launching a Global Opportunities fund, which is a multiasset product managed by the Bank’s asset and portfolio management team in collaboration with chief analyst Volker Hellmeyer.
“Since launching the fund in January 2016, we have been completely surprised by the level of interest, not just among our own clients, but also by external investors,” report Jörg Hanpeter and Maarten Kofoet, portfolio managers at the Asset- and Portfolio Management team of Bremer Landesbank. While the fund seeks emerging market exposure primarily through equites, it also holds a number of fixed income investments. “We have a strong preference for countries such as India and Russia. There has been a lot of emerging market bashing in the past, but we remain cautiously optimistic,” the team predicts.