Emerging market debt offers attractive entry levels – BNY Mellon

Investor timing, US growth and monetary policy to be key market drivers for Emerging Market Debt in 2014, according to BNY Mellon investment boutiques.

The key factors driving investment in emerging market debt in 2014 will be investor timing, US growth and tapering according to a fixed income report issued by several BNY Mellon investment boutiques. The report highlights where the opportunities for fixed income investors lie.

Colm McDonagh, fixed income manager at Insight Investment, the London-based BNY Mellon boutique, says: “We think emerging market debt now offers attractive entry levels but a key question centres on timing. EM corporate bonds are stand-out cheap but for now investors are cautious for political and volatility reasons. While this should be an attractive opportunity, the question is when, and more importantly where?” He adds: “Valuations across EMD may be becoming more interesting but in order to generate returns, it will pay to be selective.”

On the positive side, McDonagh notes the impact of tapering has already been somewhat priced into EMD since the initial concerns arose in May last year. As a result, risk premium has returned in emerging markets and investors should expect to see opportunities in certain external and local currency debt.

Also in the report, Boston-based investment firm Standish predicts modest recovery for emerging markets this year, but points out there remain threats to growth across these disparate economies. From an investment standpoint, Standish believes that better growth in the developed economies bodes well for emerging market exports and should be supportive of growth and credit quality. In the short term, increased trade flows should lead to balance of payments improvements for many exporting countries, as external demand grows more quickly than internal demand. Longer term better growth in the US and elsewhere should lead to higher foreign direct investment for emerging markets.

Although emerging markets experienced a rocky start to 2014 with pressure on local currencies, Standish remains relatively sanguine about what the volatility meant. Urban Larson, product specialist at Standish, points out emerging markets’ public-sector finances are significantly less vulnerable to currency depreciation than in the past when emerging market borrowing was largely in US dollars. He argues: “We do not expect currency volatility to trigger a balance of payments crisis in emerging markets, as it might have in the past. Additionally most emerging markets currencies are close to or below their long-term fair value.”

Insight’s McDonagh concludes that while the currency sell-off is likely to continue for a while, ultimately over-correction should create attractive opportunities for investors.

In addition to prospects for emerging markets, the fixed income report focuses on a range of additional views from BNY Mellon’s investment boutiques Alcentra, Insight, Meriten, Newton and Standish on using a multitude of different fixed income instruments to add value in a challenging market environment.

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