Emerging market debt funds saw outflows in the start of the year but concerns over the strength of the developed world pulled investors back, as Lynn Strongin Dodds reports
Unrest in the Middle East coupled with fears over inflation, higher commodity prices and the strength of the global recovery did cast a pall over emerging market debt funds at the beginning of the year. Investors took flight but it was short lived as the search for yield became more pressing. The recent events this past year though, serve as a reminder that geopolitical risk is still a threat and industry experts say a diversified fund is the best way forward.
Data from global fund tracker EPFR reflects the roller coaster ride of the past three months. About $1.4bn was withdrawn from emerging market bond funds during the six weeks to March 14 as the situation unfolded in the Middle East and North Africa.
The tide turned as markets settled down with the latest figures showing net year to date inflows reaching $7.9bn. This is in sharp contrast to the outflows of $12.9bn from European bond funds and the over $7bn withdrawn from global equity funds seen the week of 16 May of which $1.6bn came from emerging market equity funds.
The main reasons for EMD’s rebound are concerns tied to the developed world. Ratings agency Standard & Poor’s recently surprised markets by downgrading its outlook on the US’s long-term rating from stable to negative which was the first time this happened since the attack on Pearl Harbour 70 years ago. Investors were also nervous about the debt crisis in Portugal, the fresh speculation over Greece defaulting on its debt as well as the debate in Japan over additional bond issues to finance reconstruction.
Thanasis Petronikolos, head of emerging market debt for Baring Asset Management, said: “The events in the Middle East did have a short-term effect but the asset class quickly re-established itself. This is not only because of the strong underlying fundamentals but also because there has been a structural change in asset allocation away from developed and into emerging markets. Including emerging market debt into a portfolio can improve the return/risk profile of both global bond and balanced portfolios because modest correlations with developed asset classes provide diversification benefits.”
Jerome Booth, head of research at Ashmore Investment Management, added: “Recent events in North Africa and the Middle East are politically highly significant but have limited impact on sovereign creditworthiness. For example, Egypt has a much lower risk of sovereign default than Ireland, Portugal or Greece. In fact, political risk has improved in many emerging countries over the last two years. Poor electorates in countries without strong welfare states consistently vote for prudent macroeconomic policies. This is in contrast to Western Europe where political risk continues to increase substantially.”
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