Emerging markets have recovered from last year’s correction and the market for emerging-market bonds is becoming increasingly attractive, says Enzo Puntillo, Swiss & Global AM’s Head CIO Fixed Income and portfolio manager of the JB Emerging Markets Opportunities Fund…
For the first time since 2004, hard-currency bonds from emerging markets are being traded with a slight spread mark-up compared to high-yield corporate bonds, despite the lower borrowing ratio of government budgets versus companies. In addition, valuations on the local market have also improved considerably. Following last year’s correction, the market is now in a much stronger position and prepared for any forthcoming interest rate hike by the US Fed.
Markets have already priced in an interest-rate rise, following last year’s decisive monetary policy announcement by the then Fed Chief Ben Bernanke. With the actual interest-rate hike now in sight, there will be none of the surprise that markets and investors faced last year.
Following the correction last year, 80 to 90 per cent of the funds that have flowed from the retail segment into the asset class since 2009 have again been withdrawn. In contrast to the situation in 2013 and in Spring this year, we do not expect to see any renewed outflows of capital.
Growth appears to be stabilising in the emerging markets. In addition, emerging markets dependence on external financing has been reduced, a fact that is most evident in the trade balances of the so-called ‘Fragile Five’. Due to high trade-balance deficits, these countries reacted particularly strongly to outflows of foreign capital. We are now seeing significant improvements, not only with the problem countries of South Africa and Turkey but also with heavyweight India, whereas Brazil and Indonesia retain only moderate deficits. Many factors that played a role in last year’s sell-off have stabilised and are even showing signs of improvement.