GLOBAL - Emerging markets (EM) risk recovering from the financial crisis too hastily with credit and asset bubbles incubating in the region, DB Advisors chief global economist has said.
Joshua Feinman said the greatest challenge for the EM region was not re-starting their economies after the downturn, but attempting to reign them in.
"They are worried about overheating pressures, inflation pressures and in some cases credit and asset bubbles that potentially are incubating," he said.
He argued that the influx of capital was a result of low interest rates in developed nations and that the developing regions remained cautious of this capital influx, as past experiences demonstrated now capital could turn on them.
However, Feinman was not purely negative about EM markets. "Their economic fundamentals are much better than they have been in the past, so I'm not anticipating a capital flight, but it does put upward pressure on their currencies and in some cases start to challenge their export market," he said, citing Brazil as a prime example of a country where the currency has appreciated to a point where it is negatively impacting exports.
Nicolas Schlotthauer, head of emerging market debt at DB Advisors said that one of the main attractions of EM bonds were the country's low and steadily falling public debt to GDP ratios. He cited Indonesia as one of the company's preferred examples.
"Ten years ago, public debt was 100% of GDP, today it is 25% of GDP and, I mention, still falling. It is an impressive move, very far down. It is the same in some medium-sized and smaller countries like Panama, bigger countries like Russia and Chile where public debt is below 10% of GDP."
He said there had been a noticeable increase in countries classified as investment-grade in Latin America. Branding it "positive rating momentum", he said the past few weeks alone had seen a number of countries either attain the grade, such as Columbia, or others be upgraded within reach of the title.
Asked about which area would be worth considering for investors, Feinman also cited risk assets. He argued that the current climate offered a sustained if not robust recovery.
"You can't see the next recession, you can't see the next inflationary or interest-rate problem, so that's usually a time conducive to risk assets."