GLOBAL - While mainstream markets continue to baffle investors, institutions are increasingly turning to emerging market debt in the hope of healthier returns.
Ashmore Investment Management, a specialist emerging markets fund manager with offices in London and Connecticut, has witnessed strong demand from investors during the past twelve months. Flows increased by US$700m to reach US$1.8bn by year-end.
Emerging market debt has long been seen as an interesting yet marginal interest; too risky for long-term investors.
“[It was] easily ignored by consultants, over-funded pension funds and other institutional investors. Today, it is seen as a strategic allocation and an important diversifier and source of return when pension funds are under-funded and most asset classes seem to be pro-cyclical to the US business cycle,” concluded a recent report by Ashmore.
But Jerome Booth, head of research at Ashmore and author of the report, said that investors were putting money in emerging markets as a way of etching out uncorrelated returns:
“[Pension fund] investment really started to grow more aggressively about a year ago,” he said.
“For most of last year it was held back slightly because of perceptions about Brazil and much more importantly because of US uncertainty.
“But there is a ‘substitution effect’ [whereby] people who are not making money elsewhere are at some point going to have to put it somewhere that does... .”
Markets are expected to mature, with new issuances coming from a greater number of sources, yielding greater opportunities for specialist managers like Ashmore.
The fund manager says that improving credit fundamentals, positive technicals, limited issuance needs and expected new allocations all make the asset class attractive to institutions. Markets are also becoming less prone to contagion, with events in the US, the Middle East and Japan now more likely to affect risk appetite.
On a regional level, Ashmore is bullish on Brazil, Mexico, Russia, Central Europe, Venezuela (subject to a change in government) and Turkey. Special situation distressed debt is expected to perform well in China and SE Asia. Argentina is expected to remain chaotic for much of 2003, with the main opportunities in distressed and corporate debt.
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