War good for emerging markets: Emerging-market bond funds draw top inflows
By Julie Earle in New York
Published: March 19 2003 19:52 | Last Updated: March 19 2003 19:52
Investors are pouring a record amount of money into emerging-market bond funds, according to data trackers.
Last week, the funds, which number about 170 with $907bn in assets, attracted net inflows of $173.6m, or a 1.8 per cent gain in total assets, according to EmergingPortfolio.com Fund Research.
In the year to date, the funds had inflows of $864.7m, a 10.4 per cent increase in total assets, as investors sought a haven from equities.
Analysts will be keeping a close watch on weekly data, due today, that are expected to show further inflows in the wake of President George W. Bush's declaration on Monday night of an imminent war with Iraq.
"I will be surprised if more certainty about the situation in Iraq and a possible equities rally reverses flows into emerging-market bond funds," said Brad Durham, managing director of fund research at EmergingPortfolio.com.
He said investors were responding to the emerging-market debt rally, now in its sixth month. He believes emerging-market bond funds have recently been the best-performing global asset class apart from gold.
The funds have returned 6 per cent in the year to date and 11 per cent annualised over the past 10 years.
"There is a lot of upside left given the fact that Russia, which is the biggest weighting among bond funds, is still within striking distance of investment-grade status," said Mr Durham. Brazil has also recently been upgraded by credit ratings agencies. He says the funds were now being treated more like a long-term asset class, rather than a cyclical play.
Mohamed El-Erian, who manages the Pimco Emerging Markets Bond fund, with $650m in assets, also expected these funds to continue to perform well. He said the yield factor was attracting investors.
In the six months to the end of February, emerging-market bond funds returned 18 per cent. "There is scope for further strong returns but they are subject to volatility. We live in an extremely fluid world," he said.
Emerging-market bond performance has beaten emerging-market stocks. In the past three years, stocks are down 15.8 per cent while bonds returned 11.1 per cent on an annualised basis.
Mr El-Erian said risks in emerging-market bonds funds were "not an imaginary thing" and that a country could default or get downgrades. He has recently been selling eastern European bonds and buying Latin American bonds because he believes Brazil's economy is improving.
Mr El-Erian said he was encouraged by spending cuts by President Luiz Inácio Lula da Silva.
"With Lula, things have turned out better than expected," he said. |
