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Emerging markets debt funds spot sovereign buying opportunity

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Managers of emerging markets debt funds are finding more reasons for optimism than those focused on the developed world, according to Standard & Poor’s Fund Services’ annual review

Managers of emerging markets debt funds are finding more reasons for optimism than those focused on the developed world, according to Standard & Poor’s Fund Services’ annual review of the sector.

‘Many managers, such as those at MFS, feel that a large number of emerging market countries were ‘innocent bystanders’ of the crisis and the wider spreads that have developed represent a buying opportunity for good quality sovereigns,’ says S&P Fund Services lead analyst Kate Hollis, noting that the G20 meeting and extra IMF funding for deserving countries were universally felt to be positive for the market.

The fund managers stressed that the nature of the market has changed and credit differentiation will increase in future. 

‘Most managers now split Latin America into good and bad countries and many are overweight European borrowers because they are significantly overweight Russia but underweight Central Europe,’ says Hollis.

The prospects for sovereign defaults were thought low by fund managers. BNY Mellon, among others, felt that countries were more likely to devalue than to default or raise interest rates.

As for corporate defaults, nearly all the managers S&P Fund Services spoke to expect them to pick up in 2009 and many have cut pure corporates from their portfolios, investing only in quasi-sovereigns or parastatals.

‘Several managers, including those at BlackRock, pointed out that emerging corporates have large refinancing needs over the next few years. However, managers of Asian bond funds remain confident that the OECD banking crisis will not spread to their banks,’ says Hollis.

Most of the fund managers interviewed by S&P Fund Services echoed Pimco in saying that the outlook for emerging markets growth depends on the ability to shift from export-driven to demand-driven growth, within the emerging markets area. They see demand pull from China as key for Asia and Latin America and most managers thought China would continue to grow, if not quite as strongly as in recent years. However, Eastern Europe is much more dependent on the EU and prospects for growth there were seen as muted.

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