Investec EMD team: Why we’re not worried by the EMD sell-off

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Head of the Investec emerging market debt team Peter Eerdmans believes appetite for the sector will return.

EMD experienced a sell-off on the back of Federal Reserve chairman Ben Bernanke’s talk of quantitative easing ‘tapering’, which caused investors to pull out of assets they deemed as riskier – with EMD falling victim to this trend.

Eerdmans, who co-manages the £30.4m Investec Emerging Markets Blended Debt fund with Grant Webster, argues that the underlying investment case for EMD will ensure inflows will begin to pick up again.

In a fund update, Eerdmans says: “”We believe the investment case for emerging market debt is broadly intact, with positive reforms, attractive yields and better growth continuing to attract capital to emerging markets.

“Granted, investors are nervous that the slowing of QE and a rise in US rates could reverse the capital inflows to emerging market debt. However, we believe outflows will actually moderate as higher yields and better news keep investors engaged and better entry levels emerge.”

This sentiment from the managers follows a series of changes to their portfolio. For instance, an underweight position has been taken on Malausian and Polish debt with a complete sell-off of the Taiwanese dollar as well.

In order to position the fund for a possible recovery, an overweight position was taken in South African through both local and hard currency debt. Overall, the managers have maintained a neutral position in hard currency sovereign bonds to reflect increases in US Treasury yields.

Eerdmans adds: “Spreads are starting to look attractive, especially given a scenario of relatively stable US Treasury yields.

“We have moved to a tactical underweight emerging market credit position after corporate debt performed well on a relative basis. We see this as a good hedge versus our emerging market currency overweight.”

However, not all fixed income experts feel this way. M&G bond fund manager Mike Riddell argues that underlying factors prevalent to emerging markets are “broadly irrelevant”.

Riddell says: “Thailand and Malaysia had great demographics in the mid 1990s, but that didn’t prevent the Asian financial crisis.

“EMD returns are instead largely a function of US Treasury yields, the US dollar and global risk appetite, where the mix varies depending upon whether you’re looking at EM local currency debt, or EM external sovereign or corporate debt.

“EMD now offers relatively better value than a few months ago, and it therefore makes sense to be less bearish on an asset class that we have long argued has been in a bubble. That doesn’t mean I’m bullish.”

“Following the recent sell off, the vast majority of investors who have piled into EMD in the last three years are underwater, and it will be interesting to see how they react.”