36% of European institutional investment groups state they have either allocated or investigating allocating to emerging market debt in an effort to diversifying their portfolios towards countries with ‘strong economic fundamentals’, new research from Clear Path Analysis has shown.
Released just two weeks after Greece’s EUR130 billion bailout package was announced, results from the Investing in Emerging Market Currencies & Debt report sponsored by Dragon Capital, has provided further evidence that institutional investment groups are not convinced by the Euro zone’s efforts to solve their own debt crisis. The news of this ‘strategic shift’ amongst European currency and bond holders to emerging markets comes at a bad time for European finance ministries seeking to shore up confidence in European bond markets.
Alan Higgins, Head of Investment Strategy with the UK private bank, Coutts, comments in the report: “It is the relatively standard response [why bond allocations are shifting] that everyone will be familiar with – it is simply where the debt is not”
With a general shift towards emerging market currencies and debt underway, Dan Svensson, Portfolio Manager with the Vietnam based fund manager, Dragon Capital, highlights that local governments will be keen to limit the impact of large inflows into their economies, reflecting particularly on his experience in Vietnam: “The [Vietnamese] Government has shown signs that it is committed to prioritize economic stability before short term high growth.”
Pension schemes however are aware of the volatility dangers that face them when embracing the risks as an opportunity to be rewarded for taking on such uncertainty. Tomas Franzen, Chief Investment Officer with the Swedish pension fund, AP2, comments in the report: “We are there to improve the risk return of our overall portfolio … in that sense we would be more concerned about emerging market problems by and large rather than specific country risks”.
With Europe’s debt crisis appearing to be long drawn out affair with little permanent resolutions on the horizon, investors both of private and institutional mindset are looking to position their strategic allocations to the emerging world, where long term growth looks promising.
Ivan Leung, Chief Investment Strategist, J.P. Morgan Private Bank, one of the most active private banking groups in emerging regions, states: “Investors are questioning over the longer term, which currencies are going to preserve value over time and which fixed income markets are going to offer a real return”.
As Svensson of Dragon Capital states, for those investors who can live with volatility, there is, “for the fixed income investor … ample opportunities” but “Vietnam's fixed income market clearly has a long way to run before it approaches something more mainstream”, however “A number of initiatives have been launched by the Government and Vietnam Bond Market Association (VBMA) to improve and reform the secondary and primary market.”
To download your *FREE* copy of the ‘Investing in Emerging Market Currencies and Debt’ report, visit http://www.clearpathanalysis.com/reports/investing-in-emerging-market-currencies-and-debt/
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