The future looks positive for Emerging Market Debt

Institutional investors are becoming increasingly positive about Emerging Market Debt (EMD), an asset class which has gained credibility through the financial crisis, according to Pierre-Yves Bareau Head of Emerging Market Debt at J.P. Morgan Asset Management in his latest outlook.

Bareau is positive about the ongoing investment opportunities in EMD and, while a slowdown in global growth may be inevitable, he believes a pronounced downturn in emerging markets is unlikely. Year to date emerging market corporate high yield and local currency debt have performed well and are gaining in credibility as investors recognise the fundamental strength of emerging market economies and their potential for continued high growth rates. Emerging market countries, on average, have lower gross debt levels and smaller fiscal deficits compared to developed markets. Furthermore, Bareau said as well as strong returns from EMD, emerging market equities and commodities are also performing well, showing that emerging markets will continue to play a prominent role in the global economic recovery.

Bareau went on to say, "As we enter a stage where de-leveraging is an essential course of action for some turbulent European economies such as Ireland, Portugal and Spain, which is likely to see yields compressed, we are also entering a period of re-leveraging across emerging markets. This strengthens the investment case for institutional investors to be looking to gain exposure to investment grade bonds through EMD and we expect to see a further strategic shift by pension schemes and other institutional investors into EMD during 2011."

Talking about currencies when investing in EMD, Bareau said, "Exposure to currencies should be a consideration when increasing exposure to EMD, as although some local currency yields have compressed, they do still remain attractive in real terms and relative to US treasuries. Currencies in countries such as Brazil, Colombia, Mexico and Hungary have performed favourably recently and are gaining significant value. We expect to see currency appreciation during 2011 and there is particular scope for appreciation in Asian and Eastern European currencies. It is worth remembering that in a near zero interest rate environment globally currency bonds can offer some yield advantage relative to say U.S. Treasuries."

Bareau concluded by saying, "For institutional investors, EMD presents a great long term investment opportunity to diversify away from low yielding local developed market bonds and invest in global investment grade bonds. We do not anticipate that yields in developed market bonds will offer compelling opportunities in the medium term, so for pension schemes looking to match their liabilities and increase their returns we think EMD can offer a convincing solution."