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Emerging market debt – a reversal of fortunes

Investors are fleeing from emerging market debt, and optimism for any recovery in the near term is low, particularly for local currency government bonds.


PA Europe

Still too hot to handle

Short-duration hard currency funds seem a suitable stepping stone for fund selectors to reengage with emerging market debt. Thomas Romig, head of multi-asset at Assenagon in Frankfurt, had a sizeable allocation to the asset class until 2014 when he was still at Union Investment. In his new multi-asset fund, he doesn’t have any exposure to EM bonds, besides a small allocation to the Lombard Odier Convertible Bond Asia Fund.

“However, we have just been looking at a short-duration hard currency corporate bond fund, and are thinking of investing again,” he says. What would it take for Romig to go from testing the water to taking a plunge? “I would invest again if the uncertainty about the direction of the Chinese currency ebbs away,” he says, but adds that it would only be in hard currency bonds.

“Local currency is out of the question for me. When you have a strong view about certain EM currencies, then you can take a chance, but for me this asset class is simply too risky now,” concludes Romig (pictured left).

Bosma is also waiting for a bit more certainty: “I would reinvest if I got more clarity about the debt situations of many EM countries. Debts have increased there, partly because a lot of [corporate] debt was issued in dollars. However, we aren’t very optimistic. Economic outlooks need to improve and commodity prices should recover. We don’t see that happening yet.”

So it seems it will take time for most investors to regain trust in emerging market debt. As the Dutch saying goes: confidence comes by foot and leaves on horseback.

This article appeared in the March edition of the Expert Investor magazine. Click here to read the magazine online.