Emerging Debt risk aversion back to normal levels

The extreme risk aversion seen in emerging debt markets since the third quarter of last year is now reverting to more normal levels, according to Helene Williamson, Head of Emerging Debt at F&C.

She believes the second quarter of 2009 should offer opportunities to add risk to emerging debt portfolios and taking advantage of the still distorted prices in some sovereign and corporate credits.

Emerging markets' sovereign and quasi-sovereign issuance in excess of $20bn in the first quarter of 2009 suggests that a significant part of this year's financing needs has already been met.

Williamson took the opportunity to gradually added risk to the F&C Emerging Market Bond fund during this period, primarily by reducing the Mexico and Russia positions and adding higher beta credits with an attractive risk/return profile (e.g. Venezuela, Gazprom).

She explained: "The concerted G-20 effort to mobilize additional resources in the form of IMF and EU loans is a positive development for emerging markets, particularly for Eastern Europe. Risk aversion has been at extreme levels since the third quarter in 2008, but this is now reverting to more normal levels. Oil and other commodity prices appear to have stabilized." In her opinion, these two factors should support emerging market spreads that tightened by 54 basis points to 636 basis points over US Treasuries during the first quarter of 2009.

"Spreads were quite volatile, ranging between 622 and 700 basis points. A return to extreme levels of risk aversion could put pressure on spreads, however technicals for emerging market sovereign are supportive and global liquidity conditions should improve on the back of the implementation of different "quantitative easing" programmes and the disbursements of recently approved IMF programs, " she added. Williamson concluded "Future supply will depend on the balance between a possible increase in fiscal shortfalls and additional support from multilaterals".