Emerging market bubble more likely in equities than debt, says FSI

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  • Emerging market bubble more likely in equities than debt, says FSI

GLOBAL - A bubble is less likely to develop in emerging markets debt than in equities, according to First State Investments (FSI).

Gary Withers, FSI's regional managing director for EMEA, told IPE: "Due to the inflow of money and high level of returns, we have been concerned about asset bubbles potentially developing on the emerging markets equity side.

"Most investors were under-allocated emerging market equities for some time, which is why the initial flows of money came in at good valuations. Much of the more recent investment we have seen was made in the asset class at quite demanding valuation levels and has been perhaps more speculative in nature, less long term.

"But we have always been positive of emerging markets' long-term investment outlook and remain of the view that investors are set to reap rich rewards from the asset class for many years."

But Withers said the market was different on the debt side.

"While many investors, particularly European pension schemes, have been looking increasingly at emerging market debt, this asset class still looks attractive over the shorter term," he said.

"I am less concerned about asset bubbles developing there, especially as the market is set to deepen with different issuers coming in."

He says many institutional investors around the world now perceived emerging market equities as a core asset class, for which they had a set allocation.

"Emerging market debt is going to go through that same maturing process, and in the next five years, we will view emerging market debt as a standard part of the investment portfolio."

FSI is establishing an emerging markets debt team led by Helene Williamson, starting in September.

Initially, she will be supported by four new investment specialists in London, as well as two Hong Kong-based members of its existing global fixed interest and credit team.

Helene joins from F&C Asset Management, where for the past 15 years she was head of emerging market debt, including five years as head of fixed income.

Prior to that, from 1978 to 1995, she was a senior trader and held several emerging markets roles from credit restructuring to portfolio trading at
Bankers Trust Company in London and New York. She will report to Withers.

FSI plans to launch two global emerging market debt funds. Initially, the group intends to focus on hard currency funds that hold sovereign and quasi-sovereign bonds, but, with the help of First State's Sydney-based global credit team, the funds will then look to expand into local currency and corporate debt within the next year.

In other news, S&P Indices has launched the S&P Next Emerging 40, a tradable index comprising 40 of the largest and most liquid equities issued by companies from emerging markets outside the BRICs - Brazil, Russia, India and China - Taiwan and South Korea. 

Michael Orzano, associate director of global equity indices at S&P Indices, said: "With the BRICs now established as a popular investment destination, investors are looking further afield to smaller, less-developed emerging markets that may have potential for growth."

Stocks eligible for inclusion in the S&P Next Emerging 40 come from countries including Chile, the Czech Republic, Egypt, Hungary, Indonesia, Malaysia, Mexico, Morocco, Peru, the Philippines, Poland, South Africa, Thailand and Turkey.

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