Investec has ramped up the risk across its emerging market debt products in spite of the looming impact of a US interest rate rise.
Speaking at the Morningstar Investment Conference last week, Peter Eerdmans, co-head of Investec’s emerging market fixed income team, said the short-term outlook for the asset class had turned more positive.
He said he had moved the Investec funds from a low-risk position at the start of this year up to neutral in March, before taking the funds to an overweight position towards riskier assets in April.
The emerging market debt sector in the UK has yet to recover from the sell-off through May and June of 2013, in what became known as the ‘taper tantrum’.
The average fund in the IA Global Emerging Market Bond sector is still more than 11 per cent down from its peak on March 22 of that year.
Retail investors have been largely disinterested in the sector, which has had net outflows in five of the past six months, data from the Investment Association shows.
Mr Eerdmans said the bonds themselves had performed robustly but had been hit by weakness in emerging market currencies, which had depreciated against the dollar and sterling.
The manager said Investec’s underweight risk position had been largely a result of the difficult currency situation, but he said those worries had now subsided.
There were positive signs for emerging market currencies “in the next three to six months”, he said. “Data flow [from emerging market countries] has improved and we think that can continue.”
Recent research reports from CrossBorder Capital have found an uptick in money supply and liquidity within emerging markets. This led the firm to forecast a recovery for the region following several years of disappointment from both an economic and an investment point of view.
Mr Eerdmans said the debt market seemed to support such a move, with “fund flows into emerging market debt now supportive, following a lacklustre 2014”.
“And we are optimistic about the pipeline of flows as US public pension funds are starting to move into this area,” he added.
A big driver for the depreciation in emerging market currencies has been the anticipation from investors of a rise in US and UK interest rates, which would make those currencies appreciate against developing country currencies.
This can impact emerging market businesses that borrow in dollars yet make profits in their own currency.
However, Mr Eerdmans said Investec had done extensive modelling on the impact of a US interest rate increase on the emerging market debt sector.
It had concluded that “even in the most extreme rate rise scenario, emerging market debt returns should be positive in the next five years”.
He said the sector should be helped in the future by the “reinvigoration of reform agendas” within emerging market countries, as well as the attraction of the sector for investment due to relatively low valuations and attractive yields.
