Riddell issues “dangerous” emerging market debt warning
The M&G manager has taken the highly unusual step of discouraging investors from buying into the sector in which he operates.
The emerging market debt story is fatally flawed, according to Mike Riddell (pictured)
, fixed interest manager at M&G, who believes there is a severe lack of understanding around the asset class.
While Riddell thinks there is money to be made in emerging market debt – he heads up the M&G Emerging Market Bond fund
– he claims the structural long-term growth story that investors constantly flag up is fatally flawed.
"Emerging market debt is a bit like Converse shoes; it seems almost everyone I speak to owns some," he said.
"Readers will no doubt be familiar with the EM [emerging market] ‘grand narrative’ – that the asset class will surely outperform because of low debt levels, high growth and strong demographics."
"However, the performance of EM debt has had nothing to do with GDP growth rates or demographics, but has been driven primarily by global risk appetite, US Treasury yields and the US dollar."
Driven by the instability of the eurozone, he believes that emerging markets will face further country- and region-specific risks.
"Eurozone bank deleveraging means the outlook for emerging Europe – which forms over 35 per cent of some EM local currency indices – is particularly poor," he said.
"Economic rebalancing in China poses a particularly big risk to the asset class. China has had the biggest credit bubble in the world in the last three years, and rebalancing may result in GDP growth falling to as little as 5 to 6 per cent per annum."
Riddell thinks emerging market debt may once again provide a good buying opportunity; however, at current levels, he thinks investors would be wise to look elsewhere.
"I’m not saying that EM debt will never offer good value; it’s important to stress that there is no such thing as a good or bad asset class, only a good or bad valuation," he continued.
"I’m simply saying that it’s important to understand the performance characteristics of EM debt, the risks facing EM debt appear to be rising, and while some exchange rates have begun to move, the asset class does not appear to be pricing in these risks."
"Fashions rarely last – EM debt has been trendy before, but favourable demographics and previously strong growth rates didn’t save emerging markets in 1981-3, 1997-98 or 2001-02. And Converse shoes haven’t always been ‘cool’ either – Converse had to file for bankruptcy protection in 2001 and ended up being bought out by Nike."
Performance of fund vs sector over 10 years
Source: FE Analytics
Riddell’s M&G Emerging Market Bond
fund has returned 146.05 per cent in the last decade. Since the manager took over in February 2010, it has delivered 21.49 per cent – more than the vast majority of emerging market bond portfolios.