Bargain hunters are slowly moving back into emerging market (EM) debt, with local currency funds recently seeing their first net inflows in more than nine months, says Fran Rodilosso, fixed income portfolio manager for Market Vectors ETFs.
“Investors have stopped the wholesale selling and are starting to ask themselves where they can find value in EM debt,” says Rodilosso. “I think there are many places to look for opportunities – hard currency or local market, investment grade or high yield, sovereign debt or corporates. This suggests sentiment may be turning.”
Rodilosso notes that, in spite of the positive flows, there are still reasons to remain cautious, as recent troubles with Russia and Ukraine demonstrate. In addition, China remains a perennial worry for many investors, who cite that country’s slower growth, excessive leverage, liquidity squeezes, and weakening currency as evidence of potential future trouble.
“There has been a lot of attention paid to recent corporate defaults in China,” Rodilosso says, pointing out that, to date, these are few in number and involve smaller companies. “We expect to see more of these and accept it as a part of the rationalisation of the local market and the normalisation of the flow of capital. There is a long way to go, and those EM debt investors who want to avoid exposure to China may find ample opportunities elsewhere.”