Edmonton Journal

Emerging bonds good buy for the long term

- By David Pett Financial Post dpett@nationalpo­st.com

The past six months have not been kind to emerging market bond investors, and shortterm prospects don’t look promising either, but more positive returns will emerge once the global appetite for risk returns, analysts say.

“Over the next three to six months, issues need to be resolved before the way becomes clear for emerging markets to post consistent stronger returns, but it’s during this window that longerterm investors may want to increase their exposure [to bonds],” said Nick Chamie, global head of emerging markets research at RBC Capital Markets.

Re turns for emerging market bonds have been quite strong over the past two years, but losses have mounted during the past six months, as global markets reel from Europe’s ongoing sovereign crisis and concerns about a hard landing for China’s rapid-growing economy.

The Jpmorgan GBI-EM global diversifie­d index for local currency government bonds has gained 21.5% over the past 24 months, but is down 2.8% since the end of June. Meanwhile, the JPMorgan EMBI Global Diversifie­d Index for U.S. dollar denominate­d global bonds issued by emerging market government­s is up 21.7% and 2%, respective­ly, over the same two time periods.

Mr. Chamie said emerging markets are by nature volatile and extremely sensitive to global market trends and capital flow cycles. He added that it is important investors recognize that both local currency bonds as well as euro and U.s.-dollar denominate­d emerging market bonds tend to follow the overall cycle in global asset prices and, unlike other fixed-income assets such as U.S. treasuries, are not considered a flight-to-quality trade.

Emerging market bonds also generally trade in the same direction as emerging market equities, if not at the same magnitude.

“They tend to outperform significan­tly when global markets are in a good mood and are subject to larger profit-taking moves when conditions sour,” Mr. Chamie said. “However, over medium or longer periods of time, there is an underlying outperform- ing trend in emerging market assets over the past 10 years.”

Sergei Strigo, the head of emerging market debt and currency at Amundi Asset Management in London and co-manager of the Excel EM High Income Fund, expects emerging market bonds to continue to perform well in the coming years because of the developing world’s strong economic and financial fundamenta­ls.

In a presentati­on to investors earlier this month in Toronto, Mr. Strigo said credit ratings for several developing economies have dramatical­ly improved over the past decade.

The local currency debt of China, for example, is now rated - AA by Standard & Poor’s, up from BBB in January 2000, while India, Russia, Brazil and Mexico have all been upgraded over the past decade. Moreover, the percentage of investment-grade corporate credit in emerging markets rose to 56% in 2011 from 2% in 1993.

Mr. Strigo also believes emerging markets are further bolstered by falling government debt-to-gdp levels, particular­ly since debt loads are rising in Europe and the United States.

Mr. Strigo said emerging market bond yields average near 6%, versus 3.5% globally, so there is great potential for new capital inflows into the asset class and he expects global institutio­nal investors to increase their exposure to emerging market bonds significan­tly over the next few years.

Mr. Chamie agrees emerging markets are well-positioned over the medium- to long-term, but wants to see an improvemen­t in capital inflows before becoming more aggressive in buying bonds.

T he appe tite for risk among global investors is on the rise this year. Fund flows for emerging market bonds turned positive earlier this month after suffering large outflows in December and last week hit nearly US$1billion, the largest weekly inflow since markets dropped sharply in August 2011.

“If that can be maintained on a sustainabl­e basis, that is going to be a strong underpinni­ng for emerging market assets performanc­e,” Mr. Chamie said. “But my expectatio­n is that things will be rocky.”

 ?? TORU HANAI / REUTERS ?? Losses have mounted for emerging market bonds in the past six months due to Europe’s sovereign crisis
and concerns over China’s rapid-growing economy.
TORU HANAI / REUTERS Losses have mounted for emerging market bonds in the past six months due to Europe’s sovereign crisis and concerns over China’s rapid-growing economy.

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