We have seen a significant amount of activity taking place within the emerging market debt portion of our Diversified Income fund, mostly as a result of evolving fundamentals within individual markets and changing valuations.
For instance, while both Croatia and Montenegro are exhibiting deteriorating credit quality and positions here were consequently lightened, Serbia and Romania are two economies which have demonstrated improving credit attractiveness, leading to purchases here.
Elsewhere, Egypt’s international bonds have come under persistent pressure in the past two months. While political concerns are quite likely to maintain excessive wariness towards these assets in the short term, the medium-to-longer term outlook at current yields is attractive.
We continue to avoid peripheral debt. Our analysis suggests there is little convertibility premium built into current spreads, with potential upside for yields outweighing potential downside. The same is true for corporate debt, where yield spreads above government bonds appear fully priced for a benign growth environment.
Core government bond yields might rise above the medium term, but may be supported in the near term if risk sentiment deteriorates. The best value is in smaller markets such as Sweden, Norway, Australia and New Zealand.
John Stopford is manager of the Investec Diversified Income fund
