Sell off may bring buying opportunity for EM local currency debt says Barings

27th June 2013

Emerging market currency debt has a long history of recovering from outside shocks says Thanasis Petronikolos, Head of Emerging Market Debt at Barings as he makes the case for the asset class.

Petronikolos, who manages the Baring Emerging Markets Debt local currency fund, notes that emerging market bonds and currencies have not escaped the sell-off in markets, with the JPM GBI-EM Global Diversified Index declining by -4.8% in US dollar terms since June 19th.

However,  he adds: “While recent market movements have been alarming for investors, we would highlight that emerging market local currency debt has a long history of recovering quickly from a number of exogenous shocks such as the 2008 global financial crisis, before going on to post strong returns.

“In this regard, we see a clear parallel to 2004 when the Federal Reserve lifted US interest rates from 1.00% to 5.25% over a two year period. Although this initially led to two months of volatility, the robust fundamentals of the asset class eventually began to reassert themselves and – despite continued policy tightening in the US – emerging market local currency debt went on to deliver 23.0% in 2004 in US dollar terms, followed by 6.3% and 15.2% in 2005 and 2006 respectively.”

He says a similar scenario should play out now.

“We see potential for a similar scenario to play out over the coming months and we believe that the recent sell-off has created an attractive opportunity for investors to either increase or initiate exposure to the asset class.

“While we cannot rule out further short-term volatility, the longer-term investment case remains compelling, in our view. Notably, emerging market local currency debt has delivered investors double digit positive returns in seven out of the last 10 calendar years and we expect emerging bonds and currencies to continue to reward investors over the long-term, supported by the attractive economic and fiscal fundamentals of developing economies.”

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