Emerging country debt attracting investors

Following the Eurozone crisis the focus has shifted.

PARIS: The bonds of emerging countries, which have been following sounder policies than the United States and eurozone, are attracting investors seeking to diversify risks as well as earn high returns.

Today emerging markets represent 10-15 per cent of the global debt market, up from six percent in 2000, and even big money managers such as PIMCO and BNY Mellon in the US, or Swiss private bank Pictet have jumped into the game.

“Since the summer and the United States lost its triple-A rating” from Standard & Poor’s “there has been a very marked interest in this category of assets,” said Herve Thiard, director of Pictet Paris.

“At more than six per cent on average, the return on emerging country debt is very attractive in dollars as well as local currencies - it is more than three times that on US Treasury bonds” that are currently yielding around two per cent, explained Brigitte Le Bris, head of fixed-income investment at Natixis Asset Management.

Another plus, the fundamentals of these countries are generally more solid than for the US or the eurozone, which is entering a slight recession.

In a major role-reversal, emerging countries have now started lecturing advanced countries about the need to balance budgets.

“The weak growth and deep deficits in developed countries drove the need for a geographical diversification in favour of countries with growth and ... sound public finances,” said bond specialist Ernesto Bettoni at BNP Paribas bank.

The IMF says that emerging countries have on average public debts equivalent to 40 per cent of gross domestic product compared to 90 per cent for rich countries.

That debt divergence is expected to widen further through 2015, noted Didier Lambert, a bond manager at JP Morgan Asset Management.

Certain countries have been able to keep their debt level very low, such as Russia at 11.2 per cent of GDP, thanks to its oil windfall.

While ratings agencies have been repeatedly downgrading their ratings of southern European countries and the top triple-A ratings eurozone countries are under threat, they have raised their ratings for emerging markets.

Last month, Standard & Poor’s raised Brazil’s rating one notch to BBB, citing in particular the ability of its economy to withstand the slowdown in the global economy. Since last year Thailand, Malaysia, the Philippines and Indonesia have also had their ratings upgraded.

“Inflationary pressures have been contained in most of these countries, except in Turkey or South Africa. Since 2008 central banks have raised rates and their currencies have appreciated, currency reserves have grown, budgets are globally in balance,” she noted.

“All these elements help them to better resist external shocks,” said Le Bris.

Finally, emerging country bond markets have more players, which makes trading fluid, with local investors such as pension funds, insurance companies and central banks increasingly active.

Bonds in local currencies are becoming accessible for foreign investors, such as in Mexico, Brazil and Colombia.

China has yet to open up yuan-denominated debt to foreign investors, but is slowly opening up its currency. Since 2010 it has allowed foreign companies to issue debt in yuan.

Published in The Express Tribune, December 5^th, 2011.