Emerging markets weather storm as sales data more upbeat

Investors have started buying back into battered emerging market debt funds, as they surface from a storm that wiped at least 10 per cent off most portfolios in a matter of weeks.

Global fund salesflow data from US group EPFR showed that in the week to September 25, emerging market debt funds returned to positive sales after 17 negative weeks.

Emerging market debt funds saw net sales of $570m, the report said, with even local currency funds seeing net sales.

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The asset class suffered a slump in May and June after the US Federal Reserve indicated it would soon begin to reduce its bond-purchasing programme, causing most UK emerging market debt funds to fall in value by more than 10 per cent.

But a recent improvement in data from emerging market economies, and the news that the Fed is not yet reducing its bond-buying, led to a minor rally in emerging market debt in September before US macro economic concerns rattled the market once more.

Helene Williamson, head of emerging markets debt at First State Investments, said valuations had improved, with the yield on the hard currency index (of dollar-denominated debt) rising from 4.4 per cent to 5.9 per cent since the start of 2013.

She said: “At current levels the market is very attractive and we have been buying risk in the past month, especially new issues that are coming with a wide premium to the secondary market.”

Brett Diment, head of emerging market and sovereign debt at Aberdeen Asset Management, said he had become less defensive in recent months, although his funds were still more defensively positioned compared to the benchmark.

Mr Diment also cited the attractive valuations on offer in the sector and said there was increased interest in his funds from institutional investors in recent months who were looking for a long-term investment into the asset class at current valuations.

Richard House, head of emerging markets fixed income at Standard Life Investments, said the “tide was turning” for emerging market debt, with improved data out of many countries leading to an improvement in sentiment towards the asset class.

However, the managers disagreed as to where the best value in the asset class was and had been buying into different regions recently.

Ms Williamson said she was primarily buying into new bond issues in Eastern Europe and Latin America, while Mr Diment said there was good value in Brazil, which had underperformed significantly this year.

However, Mr House said there could be further falls in Brazilian debt because the potential of a debt downgrade is “pretty high”.

He said Russia was not a great source of value, preferring instead to buy debt in countries such as Mexico, Columbia and Romania.

The managers did not call the bottom of the emerging market debt market, though, and warned there could be further volatility around a potential debt crisis in the US and the renewed focus on what will happen with the US quantitative easing programme