Market professionals are increasingly scrutinizing record-tight emerging market spreads for the first signs of distress in the credit markets from rising rates. Yet improving fundamentals and positive technicals indicate spreads should remain tight for the foreseeable future. "Things won't turn adverse until the [Federal Reserve] moves from normalizing to tightening liquidity conditions," predicted John Greenwood, chief economist at INVESCO.
Raphael Kassin, head of emerging market fixed income at ABN AMRO Asset Management, noted strong demand for France's recent 50-year issue shows investors are hungry for sovereign paper and expects emerging market paper will benefit from the bid for yield. That being said, fundamentals are also strong with three quarters of the J.P. Morgan Emerging Market Bond Index rated investment grade, he added.
As for emerging market investors, they should be careful and play in countries less dependent on global liquidity, recommended Alexander Krapivko, senior portfolio manager at Alfa Capital. He underlined Brazil, Turkey and Russia as attractive for their currency reserves. Russia also benefits from high oil prices and a growing consumer market and the dismantling of Yukos, while disturbing, is more of a concern for equity investors, Krapivko said.
