Kames Capital says emerging market debt is “overbought” and is more risky since the Federal Reserve turned “hawkish”.
Scott Fleming, manager of Kames Capital’s Emerging Market Bond Fund, said investors needed to treat emerging market debt with caution following a period of strong performance, which saw a 14.2% return year to date.
State Street’s exchange-traded fund business, SPDR ETF, recently noted that emerging market debt was “very popular” with investors as they searched for yield.
Similarly, Fleming said that “eye-catching gains” – ahead of many types of fixed income, as well as other asset classes – have prompted increased interest from investors, with emerging market debt seeing 11 consecutive weeks of inflows.
But he added: “A recent shift to a more hawkish tilt by the Fed, coupled with an upward trajectory for core personal consumption expenditures inflation, are early warning signs for emerging markets.”
Fleming said that these represented rising threats to the sustainable nature of the performance of emerging market bonds, particularly the higher yielding portion of the market where spreads reflect levels which are currently “overbought”.
As well as Fed policy banks in some emerging markets had issues with an increase in the number of non-performing loans, adding additional risk, he said.
Diversification and “sensible market growth premia” were important in selecting emerging market bonds, with countries such as Indonesia, India, Peru, Colombia, Romania and the Philippines cited as favoured issuers.
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