First State makes EM bond fund available in Germany and Austria

First State Investments has made its Emerging Markets Bond fund available to investors in Germany and Austria, at a time this community seems increasingly sick of the meagre yields on local debt alternatives.

Helene Williamson, manager, said: “In our opinion now is a good time for investing in growth markets’ fixed income, because the yields on sovereign debt in the US and strong economies in the eurozone are minimal, and the risks in the eurozone’s peripheral nations are growing.”

Investors at yesterday’s German debt auction seemed to agree with her as they left twice the average volume of Bunds on the table as they do historically.

Williamson‘s fund invests in hard currency paper issued or guaranteed by emerging market states, financial institutes or businesses. It invests mainly in US dollar-denominated paper, but can hold some local currency issues.

As EM corporates issue more paper – so far this year about $180bn, double the debt their sovereigns issued – Williamson will consider it, mindful not least of liquidity.

Where appropriate, she can also buy quasi sovereigns – State-backed, but trading on spreads wider than debt – and names Russian Agricultural Bank, Brazil’s EMBS development bank, Mexico’s Petróleos Mexicanos as some examples. Kazakhstan has only quasi-sovereign, not sovereign, paper.

Williamson said EMD was a popular asset class, though paper from Hungary, Lithuania and Croatia had underperformed recently, partly because European banks holding it had been selling.

She added the average developing world fiscal deficit of about 2% compares well with the 7.5% average among advanced economies.

Since 2008 emerging economies have experienced more improvements to credit worthiness ratings than demotions, despite some downgrades during the Arabian world uprisings. Brazil and Kazakhstan have each won upgrades this month.

Williamson said EMs overall are also enjoying stronger economic growth prospects, lower debt levels, and fewer incidents of political meddling than developing markets.

“It is not only that the credit quality is better today in EMs, but they will improve more than the developed world because most EMs have younger populations and little in terms of pension liabilities, which is clearly a big issue for a lot of the developed world.

Williamson‘s fund looks to generate both yield and capital growth and will hold 50 to 120 positions.

It also aims to beat the JPMorgan EMBI Global Diversified Index on a risk-adjusted basis.


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