What Next for Emerging Market Debt?

Fears about emerging markets don't look like they're going to go away any time soon, so what is the prospect for emerging market debt?

Emma Wall 10 March, 2014 | 3:55PM
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Emma Wall: Hello, and welcome to the Morningstar series, Why Should I Invest With You. I'm Emma Wall, and here with me today is Helene Williamson, Manager of the First State Emerging Market Bond fund.

Hello, Helene.

Helene Williamson: Hello, Emma. Thanks for having me.

Wall: So, the fund was launched two years ago, and these have been two of the most challenging years for Emerging Market Debt, last year in particular. How have you faced those challenges?

Williamson: Yes. I think, probably 2012 was actually quite an easy year because everything in emerging markets went up and there was very little discrimination and the market just kept producing performance. I think in 2013 after the  – there was a big wobble after the tapering announcement in May, and I think there you needed to take risk off in the second quarter and then put it back on in the third quarter, because the market did re-price quite substantially from about a yield of 4.6% to about 6.4% at the high.

Wall: And of course, the impact of tapering hasn't gone away. QE continues to be shaved back by the Fed. This has created quite a lot of volatility in emerging market debt. How would you manage that so that the investors aren't hit?

Williamson: I think, there is clearly number of worries, but tapering is one. The other is also that investors probably are seeing a lot of headlines about emerging markets because currencies are volatile. In many ways that's actually a good thing that currencies are flexible and emerging market countries don't defend fixed exchange rates any more. But generally our fund tends to be in more liquid things, so we can move in and out when we change our mind. And we have certain core positions, which we hold with a very high conviction.

Wall: I mean, you mentioned there the currency risk. Does that mean there is certain region, certain countries that you are just not going into because it's too risky?

Williamson: Not really, because – I think it all depends what is priced into the market and what is priced into bonds. But we look at very carefully at the risk/reward for each position.

Wall: Looking forward then over the sort of medium term, tapering and fears about emerging markets don't look like they're going to go away any time soon, what is the prospect for emerging market debt, should investors just sort of buck up and get stuck in?

Williamson: I think the market has re-priced a lot currently. Yields are about 6%; given how low yields are in in the developed world we think that's very attractive. We also think you need to be selective, so I don't think you want to just own everything. You need to pick the right – last year was very much about getting the market right, this year will be very much in our view about getting the right countries.

Wall: And where do you think those opportunities lie.

Williamson: We think there is some opportunity in Eastern Europe, so we like countries like Poland or Romania because they're very closely linked to the industrial production cycle in Germany. We think German growth will surprise on the upside. We also like countries like Mexico, which have a reform agenda which they're doing. So, thus, we look at those kinds of opportunities.

Wall: And 6%, obviously, is very attractive as you say in such a low interest rate environment. So, investors perhaps need to up their exposure.

Williamson: Yes, we think there is – as I said, I think the market is attractive at current levels, and I think the market has re-priced a lot and now is offering a good entry point. I think there are some cyclical headwinds for emerging markets, but I think people are so bearish about emerging markets, that they're forgetting the long-term structural positives say in the asset class.

Wall: Helene, thank you very much.

Williamson: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Emma Wall  is former Senior International Editor for Morningstar

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