The Trade - Issue 50 Winter 2016

The JP Morgan EMBI index of sovereign EMD was up 14.3% to October. Hard currency EMD currently yields around 350bps over treasuries. Yields of local currency debt, meanwhile, are now at around 6.2%. While the money coming into EMD has seen sovereign spreads over US treasuries compress by more than 80 basis points in the year, with yields on hard currency debt coming down from 7% at the beginning of 2016, participants believe there is still much more value to be found across the market.

“For any matrix you look at the allocation to EMD is much lower than it was a couple of years ago,” says JC Sambor, deputy head of emerging market fixed income at BNP Paribas Investment Partners.

“There is still a lot of room before
it becomes bubble territory. The
flows are very much diverse and
sustainable.”
“Many countries in the emerg-
ing markets have adjusted their
balance sheets to deal with the
prospects of slower growth. You
have seen asset disposals and po-
litical regimes changing as well as
currency adjustments. With yields
in developed assets down and equi-
ties under pressure, investors have
returned to look for carry and yield
in the emerging markets.”
The yield draw for investors in
EMD is hard to ignore right now.

After a barren year-and-a- half, emerging market debt (EMD) has seen a resurgence of interest in the last few months as foreign investors turn to the asset for that most precious of things right now—yield. Allocation to EMD slumped to $35.2bn in 2015—compared to an average of around $250bn in the three previous years—as concerns over a slowing economic environment, in particular in China, checked investment from foreign asset owners. But after a slow start, things have gradually picked up since the middle of this year. The third quarter of 2016 saw the highest foreign influx of money since 2014 with

$27bn of non-resident flows into the market, according to statistics by the Institute of International Finance (IIF). And it seems likely that this will continue to increase, according to industry participants.

“We have come through a period

2015 was a major down
year for emerging market
debt, but things are
picking up as billions flow
into the market with no
sign of slowing, writes
Sarfraz Thind.