UK - Emerging market debt will provide long-term investors with welcome returns despite suffering a recent dip in performance, Axa Investment Managers claims.
The asset class suffered its worst performance last month since the run-up to the 2002 Brazilian elections. But Axa IM predicts the emerging market debt bond market will benefit from the further search for yield and accommodating interest rates.
The asset class has become popular with pension funds after starting to pick up in late 2002. As an example, the firm pointed out that total returns of Brazilian bonds between October 2002 and December 2003 were 124%.
Axa IM head of emerging markets Nadine Tremollieres said: “There are still good opportunities in the asset class that need to be assessed via a thorough analysis of the economic fundamentals, debt and market rates, market sentiment and political climate – all factors which we use when it comes to managing emerging market debt portfolios.”
She added: “In terms of diversification, one of the benefits of investing in emerging market debt is that it allows managers to create lowly correlated portfolios.
“Local debt markets in investment-grade countries have matured and successfully decoupled from external debt. They follow their own dynamic path with higher liquidity and reduced volatility, as high participation from local and crossover investors have increased the depth of the markets.”
The popularity of the asset class with pension funds has also helped, by providing a stable investor base which allows emerging countries to issue longer duration local and external debt.
Tremollieres said improving quality in emerging market debt countries would also bolster the class.
“Market-friendly economic policies are now widely recognised as necessary to attract foreign investment.”
She added: “The previously depressed economies of pot-ential EMU members in eastern Europe are quickly becoming more developed. Meanwhile, Asian countries are benefiting from a combination of stron-ger domestic demand and exports.”
The firm’s emerging debt funds have performed well over recent years with Axa Emergence outperforming the benchmark and returning 50.99% over three years and 80.05% over five years.
The top stories this week were the High Court's decision to block the £12bn annuity transfer from Prudential to Rothesay Life, and a separate court ruling that 'raises the bar' for pension rectification exercises.
Guaranteed minimum pension (GMP) equalisation has soared to the top of pension schemes' to-do lists, with 58% stating it is a priority project, research from Equiniti has revealed.
Professional Pensions is holding its defined contribution (DC) conference on 4 September.