Investors are least bullish on emerging market debt, according to a recent poll of FE Trustnet readers, despite a rapid turnaround in the market in the past three months. 
Of four out-of-favour areas of the market – US equities, Japanese equities, high yield bonds and emerging market debt – the latter was overwhelmingly the least interesting to more than 1,500 FE Trustnet readers surveyed recently, with almost half saying they are staying away.
For almost three years the funds buying the credit and sovereign debt of emerging market countries have, taken on average, been mostly losing money for investors, rendering the asset class to be highly unpopular both with many fund managers and their underlying clients.
Again, last year was a somewhat disastrous one for investors in emerging market debt. The average portfolio in the IA Global Emerging Market Bond sector fell 5.04 per cent and three out of four lost money that year.
However, the start of 2016 has seen the most substantial snapback since emerging market debt (EMD) began selling off in June 2013 during the ‘taper tantrum’ that was sparked when the US Federal Reserve warned it would start to withdraw its $85bn a month quantitative easing at some point in near future.
Performance of sector and index since January 2015
Source: FE Analytics. Past performance is not a guide to future returns
Emerging market debt faced a very tough 2015 as investors broadly sold down exposure to the developing world due to fears of slowing growth in China, a commodity bear market and concern about the impact of the imminent Fed rate hike plans.
FE Analytics shows the average IA Global Emerging Market Bond fund has lost 10.01 per cent, compared with an average return of 1.54 per cent in the IA Global Bond sector since the taper tantrum.
Performance of sectors since taper tantrum
Source: FE Analytics. Past performance is not a guide to future returns
However, 10 funds in the IA Global Emerging Market Bond sector (out of 35) bucked the trend since the taper tantrum sell-off and made a positive return over the period since. Four funds returned more than 8 per cent.
Source: FE Analytics. Past performance is not a guide to future returns
These are Pictet Global Emerging Debt, L&G Emerging Markets Government Bond Index, Invesco Emerging Markets Bond and Candriam Bonds Emerging Markets.
All 10 funds are top quartile over three years, expect First State Emerging Markets Bond, and those with a long enough track record are also top quartile over five years.
All have outperformed the sector average in at least the last three full calendar years and most have done so for much longer. Indeed, the $959m Candriam Bonds Emerging Markets has been top quartile in every calendar year since 2008.
Chris Iggo, chief investment officer for fixed income at AXA Investment Managers, says emerging market debt has performed particularly well as certain assets have recovered from very distressed levels.
“Credit spreads reached their widest levels in mid-February and at those levels were pricing in a much worse economic outlook than most economists believe is likely – not just a gross domestic product [GDP] recession but a serious downturn leading to widespread corporate defaults.”
“Of course, negative GDP growth is possible in those economies that are already growing at very low rates of growth (in other words, where economic growth has stagnated), but the type of 2008 downturn is not likely.”
Charles Hepworth, investment director at GAM, holds emerging market debt via the £100m Standard Life Investments Emerging Market Debt and the Standard Life Investments Emerging Market Debt Unconstrained funds headed by FE Alpha Manager Richard House.
“We’re therefore holding both local and hard currency EMD positions. Both have done well this year up 4.9 per cent and 2.3 per cent respectively.”
“Yield pickups are obviously attractive vs the much more expensive a low-yielding Western debt markets and as long as we see improvements in emerging market current accounts then the bonds won’t really be under pressure from aggressive currency movements.”
“You have to be careful where you go in EMD but the manager, Richard House, but has a wealth of experience in these markets.”
Mike Deverell, investment manager at Equilibrium, doesn’t currently hold any direct emerging market debt in his portfolios.
“We are still quite light on fixed interest generally but have recently increased allocation given depressed values in corporate bonds. However, we are purchasing strategic bond funds in general and we let the manager decide how much to allocate to EMD,” he said.
“Generally, our managers are seeing more value in financials and selected high yield and don’t have a great deal of EMD.”
