“Overbought” EM bond market turns more risky

Kames Capital says emerging market debt is “overbought” and is more risky since the Federal Reserve turned “hawkish”. Scott Fleming, manager of Kames Capital’s Emerging Market Bond Fund, said investors needed to treat emerging market debt with caution following a period of strong performance, which saw a 14.2% return year to date. State Street’s exchange-traded fund business, SPDR ETF, recently noted that emerging market debt was “very popular” with investors as they searched for yield. Similarly, Fleming said that “eye-catching gains” - ahead of many types of fixed income, as well as other asset classes - have prompted increased interest from investors, with emerging market debt seeing 11 consecutive weeks of inflows. But he added: “A recent shift to a more hawkish tilt by the Fed, coupled with an upward trajectory for core personal consumption expenditures inflation, are early warning signs for emerging markets.” Fleming said that these represented rising threats to the sustainable nature of the performance of emerging market bonds, particularly the higher yielding portion of the market where spreads reflect levels which are currently “overbought”. As well as Fed policy banks in some emerging markets had issues with an increase in the number of non-performing loans, adding additional risk, he said. Diversification and “sensible market growth premia” were important in selecting emerging market bonds, with countries such as Indonesia, India, Peru, Colombia, Romania and the Philippines cited as favoured issuers. ©2016 funds europe

Executive Interviews

INTERVIEW: ‘It is what it is’

Dec 22, 2016

Jeff Conway, regional chief executive for State Street, talks to David Stevenson about regulation and how the firm will handle the challenge of tech disruption.

MASHREQ CAPITAL INTERVIEW: A new direction

Dec 22, 2016

The new chief executive of Mashreq Capital talks to George Mitton about fund launches, management style and why he is the right person for the job.

Roundtables

SEC LENDING ROUNDTABLE: Both a borrower and a lender be

Jan 11, 2017

Industry heavyweights, including agent lenders, discuss issues affecting the securities lending sector such as regulation and the types of collateral being used.

EMERGING MARKETS ROUNDTABLE: The re-emergence

Jan 03, 2017

2016 was the year emerging markets returned to the spotlight, as they regained ground since the 2012 sell-off. Funds Europe asked our panel if this appetite will persist in 2017.