Investment advice: Hold fire on emerging market debt

Cautious investors should wait before they dive into this latest bond sector

Simon Read
Saturday 11 January 2014 12:35

A new investment sector has been introduced for 2014 in recognition of the growing number of bond funds that invest in emerging markets. The Global Emerging Markets Bond sector encompasses 25 funds from big names such as Aberdeen, Invesco, M&G and Threadneedle.

But does the launch of the new sector mean it’s time for investors to take a closer look at emerging market debt? Investors should approach it with caution, advised Darius McDermott, boss of Chelsea Financial Services.

“Funds investing in local currencies had a torrid 2013, with the double whammy of tapering worries and a strengthening US dollar leading to a number of local currencies depreciating significantly,” he said.

“In the shorter term, the next two to three years, I think funds investing in the US dollar will do better.”

Specialist fund managers, as you’d expect, offer a more positive outlook. “2014 may not be an easy ride, although we expect returns to be positive,” said John Peta, co-head of Threadneedle’s emerging market debt team.

“Emerging markets continue to be supported by favourable long-term structural factors but the question is whether emerging markets can surprise us with growth this year, since it is stronger growth which has traditionally drawn investors in.”

Brett Diment, head of emerging market and sovereign debt at Aberdeen, conceded that there could be some choppy waters for the sector this year, but he added: “We believe the outlook for the asset class over the medium to long-term remains healthy due to attractive yields compared to developed market bonds.”

Fidelity’s fixed income chief, Andrew Wells, highlighted the opportunities presented by so-called dim sum bonds, which invest in Chinese debt. “They proved resilient last year and we expect another steady performance from them in 2014, especially in light of recent reform announcements.”

Mr McDermott predicted that the second half of 2014 could be a better time to invest. “Hopefully, the global recovery will be growing by then,” he said.

Then, he suggested, investors could look at emerging market debt funds from Standard Life or Investec.

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