Opportunities in emerging market government bonds

As the debate surrounding whether investors should continue to invest in UK Government Bonds continues, Mark Pearce, Fixed Income and Alternatives Investment Specialist at Threadneedle, believes there are still attractive opportunities for investors in government bonds in emerging markets.

Pearce believes more traditional economic and political policies being employed by emerging market governments and central banks have brought stability to these markets helping to reduce the possibility of default when compared to the environment ten years ago.

Mark Pearce comments: "We believe there are still great opportunities to invest in government bonds from emerging markets. Emerging market economies have improved dramatically over the past decade, with many countries holding foreign reserves well in excess of their external debt. More traditional economic and political policies by central banks and governments have brought stability to such markets, which in turn have significantly reduced the possibility of default. Indeed, we believe that less than 5% of emerging market sovereign issuers are at any risk of default in the near term. However, this does not apply to the emerging corporate bond market, which we feel is exposed to significant default risk and ongoing problems in terms of liquidity.

"Venezuela, Brazil and Russia are countries we favour and consider to be strong creditors. This means they have low levels of debt relative to reserves and are in a good position to meet all short term debt obligations. We are also keen on the dollar denominated debt of Mexico which has underperformed in recent months. Furthermore, large issuers such as Hungary, Turkey and Russia are still cutting interest rates, which provide significant upside for bond investors at a time when some segments of the market are questioning whether recent strength has limited the return potential of this asset class."

Pearce continues: "Investors who want exposure to emerging market debt should choose their fund carefully. Given the problems faced by investors during 2008, liquidity and transparency are the most important things an investor should be looking for in an emerging market debt fund. Also the skills necessary to manage local currency bonds are different to those necessary to manage traditional external / dollar denominated bonds."