International investment management firm Baring Asset Management (Barings) believes that the ongoing structural change in global asset allocation triggered by the financial crisis will favour bonds of emerging markets. Emerging market local debt will be accessed particularly by OECD based pension funds and emerging market pension funds, said Barings.
“Emerging market local debt has produced attractive risk-adjusted returns so far this year and has proved resilient, despite a risk-averse environment due to the concerns surrounding the European sovereign debt crisis and the sustainability of global growth. Capital inflows to emerging markets are strong and rising, and improving fiscal and debt profiles continue to underline the credit quality of most emerging market economies,” said Thanasis Petronikolos, head of Emerging Market Debt and manager of the Baring Emerging Markets Debt Local Currency Fund.
“Furthermore, the fundamentals in many emerging market economies are favourable due to the region’s strong economic growth potential as well as the relative strength of the banking systems and sovereign balance sheets. A lack of yield in alternative areas of fixed income means that investor demand for emerging markets assets remains strong,” he added.
Many emerging market currencies are undervalued compared to their advanced economy peers, Mr. Petronikolos observed. Currency appreciation combined with capital gains potential and enhanced income will be the key reasons for investing in emerging market debts, he said.
“In terms of current asset allocation of the Baring Emerging Markets Debt Local Currency Fund, we continue to see value in Hungary, Mexico and Brazil government debt ahead of Russia and Turkey. In the case of Hungary, the higher spreads on offer over German bunds have proved attractive. We also believe that the Mexican peso has further room for appreciation against the US dollar in the coming months and our country exposure is running at 14.5% as a consequence. We remain underweight Russia and our small position here reflects our view that the market’s full potential has yet to be realised,” he said.
“With modest correlations against most developed fixed income and equity markets and a track record of delivering superior risk-adjusted returns, emerging market debt can improve the return to risk profile for investors when held as part of a global diversified investment portfolio,” he added.