Rise in emerging bond yields is 'a mini-correction'
The rise in yields on emerging market debt over the past two weeks represents a buying opportunity for some of the assets, an expert tells Emerging Markets
Last week was the first in nearly one year to see outflows from emerging market bond funds; but opportunities to buy emerging market debt will appear again, Colm McDonagh, head of emerging market debt at asset manager Insight Investment said.
"There's a mini-correction but there will be opportunities to buy back again," McDonagh said in an interview on the sidelines of the firm's presentation of its outlook for bonds and currencies.
The outflow from emerging market bond funds was $866 million in the week ending on May 29, with the 52-week average flows now standing at $866.2 million, sharply down from $1.35 billion in the previous week, according to data from UniCredit's EM bond fund flows weekly report.
In terms of opportunities, investors should look at "real interest rates in Eastern Europe, Latin America," said McDonagh, who gave the example of Mexico as a country with a good policy mix.
Insight Investment is short emerging markets hard currency debt and long local currency debt.
"Some opportunity will return once the correction is over," said McDonagh, noting there are also some "good corporate opportunities."
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However, he warned that in certain parts of the emerging world the risks taken by investors were too high.
"Some investors are yield tourists," McDonagh said.
In Latin America, he highlighted worries about policy action from Brazil which last night scrapped a 6% transaction tax on buying of domestic bonds by foreigners amid a depreciation of the real but also about countries like Venezuela and Argentina.
An economist warned recently that Venezuela was getting closer to a balance of payments crisis.
McDonagh also noted there was a lot of "political noise" in certain countries in North Africa and in Turkey.
There is "far more differentiation in emerging markets now than three years ago," he added.
"We're entering into more unorthodox territory, which is something I don't think is priced into the market."
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