Dangers lurk beneath the attractive surface of emerging market gilts

With UK gilts paying next to nothing and continued worries over the debt of the eurozone countries, investment companies are gearing up to sell funds which invest in the government bonds of emerging economies.

These funds are presented as a safer way to gain exposure to the emerging economies, while offering high returns of around 6 or 7 per cent a year. But are they safe?

"It is right people take a cautious tone and understand the risks compared to more traditional types of funds," says Adrian Lowcock, a senior investment adviser at Bestinvest. "Although there is a long-term opportunity here, they aren't like other debt funds – they are far from suitable for everyone."

Mr Lowcock also warns that a lot of these new funds, and in some cases managers, do not have a track record. "Some launch funds to capture a trend," he says. "So you want a fund manager who has spent time running it and can prove they know what they're doing," he adds.

There is also the wider danger of a eurozone country default, which would harm the market in emerging, as well as Western government, gilts.

Nevertheless, the emerging markets story is a compelling one for investors and it follows that the government bonds of these countries will also appeal. "There are several attractions of investing in emerging market debt," says Ben Willis, an investment manager at Whitechurch Securities. "There's the potential for appreciating currencies, solid returns of around 6 or 7 per cent at present, and they are relatively unexposed to the sovereign debt issues that plague Western economies."

But, a recent report from the ratings agency Fitch shows that only the top 25 per cent of emerging market debt funds delivered positive returns last year.

"Despite the debt dynamics of emerging market governments, their debt isn't deemed a safe haven in nervous market conditions," says Brian Dennehy, the managing director of Dennehy Weller & Co. If you seek safety, then it's not just a case of looking for a government that won't default, but also having bonds you can easily sell if necessary.

But, history shows there have been plenty of defaults and economic crises in emerging markets, including the Asian banking crisis in the Nineties, plus Mexico's and Argentina's defaults the following decade. Although the Bric countries – Brazil, Russia, India, China – are powering ahead, not every emerging market will continue to grow nor will each government be able always to pay its debts. "Emerging market debt must be considered relatively high risk, as we are dealing with economies many of which are going through structural changes," says Mr Willis. "Also, in several countries there is a precedent for political risk."

But, these bonds can play a useful role in a portfolio. "Emerging market debt provides diversification away from traditional bond funds," says Meera Patel from Hargreaves Lansdown. "But, I would caution investors that they should not be tempted purely by the headline yields on offer."

Emma Dunkley is a reporter at Citywire.co.uk

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Suggested Topics
election 2015The 10 best quotes of the campaign
A caravan being used as a polling station in Ford near Salisbury, during the 2010 election
election 2015The Independent's guide to get you through polling day
David Blunkett joins the Labour candidate for Redcar Anna Turley on a campaigning visit last month
voicesWhat I learnt from my years in government, by the former Home Secretary David Blunkett
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Editor-in-chief - Financial Services - City, London

    £60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

    Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

    £25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

    Guru Careers: Management Accountant

    £27 - 35k + Bonus + Benefits: Guru Careers: A Management Accountant is needed ...

    Guru Careers: Project Manager / Business Analyst

    £40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...

    Day In a Page

    General Election 2015: ‘We will not sit down with Nicola Sturgeon’, says Ed Balls

    'We will not sit down with Nicola Sturgeon'

    In an exclusive interview, Ed Balls says he won't negotiate his first Budget with SNP MPs - even if Labour need their votes to secure its passage
    VE Day 70th anniversary: How ordinary Britons celebrated the end of war in Europe

    How ordinary Britons celebrated VE Day

    Our perception of VE Day usually involves crowds of giddy Britons casting off the shackles of war with gay abandon. The truth was more nuanced
    They came in with William Caxton's printing press, but typefaces still matter in the digital age

    Typefaces still matter in the digital age

    A new typeface once took years to create, now thousands are available at the click of a drop-down menu. So why do most of us still rely on the old classics, asks Meg Carter?
    Discovery of 'missing link' between the two main life-forms on Earth could explain evolution of animals, say scientists

    'Missing link' between Earth's two life-forms found

    New microbial species tells us something about our dark past, say scientists
    The Pan Am Experience is a 'flight' back to the 1970s that never takes off - at least, not literally

    Pan Am Experience: A 'flight' back to the 70s

    Tim Walker checks in and checks out a four-hour journey with a difference
    Humans aren't alone in indulging in politics - it's everywhere in the animal world

    Humans aren't alone in indulging in politics

    Voting, mutual back-scratching, coups and charismatic leaders - it's everywhere in the animal world
    Crisp sales are in decline - but this tasty trivia might tempt back the turncoats

    Crisp sales are in decline

    As a nation we're filling up on popcorn and pitta chips and forsaking their potato-based predecessors
    Ronald McDonald the muse? Why Banksy, Ron English and Keith Coventry are lovin' Maccy D's

    Ronald McDonald the muse

    A new wave of artists is taking inspiration from the fast food chain
    13 best picnic blankets

    13 best picnic blankets

    Dine al fresco without the grass stains and damp bottoms with something from our pick of picnic rugs
    Barcelona 3 Bayern Munich 0 player ratings: Lionel Messi scores twice - but does he score highest in our ratings?

    Barcelona vs Bayern Munich player ratings

    Lionel Messi scores twice - but does he score highest in our ratings?
    Martin Guptill: Explosive New Zealand batsman who sets the range for Kiwis' big guns

    Explosive batsman who sets the range for Kiwis' big guns

    Martin Guptill has smashed early runs for Derbyshire and tells Richard Edwards to expect more from the 'freakish' Brendon McCullum and his buoyant team during their tour of England
    General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

    Miliband's unlikely journey from hapless geek to heart-throb

    He was meant to be Labour's biggest handicap - but has become almost an asset
    General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

    On the margins

    From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
    Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

    'This is the battle of young Egypt for the future of our country'

    Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
    Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

    Why patients must rely less on doctors

    Improving our own health is the 'blockbuster drug of the century'