Ask The Experts: Why Invest in Emerging Markets Debt?
Imran Khan, the Director of Fixed Income at UOB Asset Management Ltd shares his outlook on emerging market debt.
1. What is your outlook on emerging market debt for 2012?
He is generally positive about emerging market bonds (EM bonds) in 2012 and believes that EM bonds have the potential to provide multiple-year performance. Looking at the performances of EM bonds in the past decade, they have provided stable and consistent returns.
2. How much upside do you see and what are the key drivers?
EM bonds can provide yields of around 6%-7% per annum. The key driver for EM bonds is improving credit quality of the countries and companies that they invest in.
3. In your opinion, why is the credit quality improving?
This is because the economies of these countries are increasingly well-managed and they have demonstrated their ability to weather through growth cycles and different crises, especially with what happened in 2008. He thinks that this is a structural phenomenon which will carry on at least till the next decade.
4. What about the downside risks?
EM bonds are not a safe haven asset. There is a possibility that they can underperform in periods of global risk aversion, i.e. in late 2008 and late 2011. However, EM bonds are more stable and do not underperform as poorly as equities and have shown that they can recover quicker than equities too.
5. Within emerging market debt, is there one idea/sector that you feel particularly bullish or bearish about?
He likes the resources sector i.e. oil and gas companies and emerging market currencies. He thinks that emerging market currencies are undervalued as compared to other major currencies.
6. What is your advice for investors looking to invest or are currently invested in emerging market debt?
He advises investors to be patient with their investment in EM bonds because the compounding effect that investors get, provides good returns in the long-term. It is not too late for investors to invest in EM bonds and capture the upside gains if they have not invested in them yet. Of course, investors should know that there are risks associated with EM bonds and investors should understand the asset class first before investing in them.
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