Emerging market debt (EMD) has a legitimate place in any portfolio, now more than ever, and the opportunities should compel Australian investors to make a special allocation to the sector, according to an HSBC executive.
“The debt crisis in Europe and the low interest rates in the United States and Japan should force financial advisers to [explore] possibilities that EMD could make sense to portfolios,” HSBC Global Asset Management head of emerging market debt business strategy Peter Marber told InvestorDaily.
Strong returns from Australian stocks and bonds in the past decade plus the high-risk misconception of emerging markets had kept interest at bay, but investors now needed to reorient themselves with the asset class, Marber said.
“We used to think that major markets had superior debt dynamics versus the inferior dynamics of those [countries] that were emerging, [but] peer group data suggests that an average emerging market manager beats the emerging market indexes by more than the average global manager beats the global index,” he said.
With the strong Australian dollar, a suitable EMD allocation approach for Australian investors was to go into a currency strategy where emerging currencies were typically undervalued, he said.
“To diversify out of the Australia dollar, you want to find a market that’s compelling, but Europe isn’t compelling in its current global values and in the United States you get very little yield, much lower than in Australia,” he said.
“That’s why financial advisers need to consider emerging markets at this moment in time. You’d be going from a relatively expensive currency into a relatively cheaper currency.”
In order for advisers to become comfortable with EMD, a good knowledge of the fundamental trends in the market was required, he said.
“Right now we have over 45 emerging market countries that are invested in today – that’s a big change from 16 years ago,” he said.
“If you think emerging markets are mostly a high-yield downfall market, then you’ve been missing these massive credit changes that have occurred just in the last decade or so. It’s amazing that most emerging markets still grew in 2009 while most of the advanced economies plunged into a recession.”
