NewAfter sell-off and China slowdown, investors pile back into emerging market bonds
Plunging commodity prices and a slowdown in China have prompted a sell-off of emerging market bonds over the last two years, but some investors have started to dip their toes back into the beleaguered sector.
Capital flows have turned positive amid a wave of currency depreciation over the last several years, and investors such as Eaton Vance and HSBC Asset Management have added exposure to emerging markets.
The decline in oil prices over the summer of 2014 drove a sell-off in currencies of emerging market energy exporters. Overall, emerging market currencies have depreciated against the US dollar by an average of 30 per cent following their post-financial crisis peak in 2011, according to estimates from HSBC Asset Management.
Portfolio flows into local currency bonds grew in Latin America this month but decreased in some Asian countries, such as China, Malaysia and the Philippines
This depreciation has created opportunities for patient investors willing to scour for bargains.
“We are at that important juncture where currency weakness has become a positive tailwind for emerging market debt,” said Kathleen Gaffney, co-director of diversified fixed income at Eaton Vance in Boston.
The market is not for the faint of heart, though. Some investors are buying with the understanding that there is a big risk that emerging market assets might drop further.
But undervalued bonds denominated in local currency from Brazil, Turkey and Mexico are enticing to some who see value now. Investors are citing high annual returns of up to 15 per cent on some of these securities.
“There’s no free lunch, but at least you’re getting paid for the risk you’re taking,” said Guillermo Ossés, head of global emerging markets debt portfolio management at HSBC Asset Management in New York.