Emerging markets debt is hitting record inflows as institutional investors turn to developing nations to bolster fixed-income returns.
So far this year, emerging markets bonds have attracted $12.8 billion, about 60% more than the $8 billion recorded for all of last year.
This year's inflows also surpassed the previous annual record set in 2005, when emerging markets bond strategies attracted a total of $9.7 billion in assets, according to Cambridge, Mass.-based industry data provider Emerging Portfolio Fund Research Inc.
“This is a group of countries with relatively strong balance sheets offering attractive levels of yield,” said Michael Gomez, executive vice president and co-head of the emerging markets portfolio management team at Pacific Investment Management Co. based in Munich. “Pension funds are recognizing that.”
Kevin Daly, emerging markets debt portfolio manager at Aberdeen Asset Management based in London, added: “The perception in the past has been that emerging markets bonds are too risky, but that's changing. There's a growing realization among investors that fiscal and monetary reforms in some of these nations have improved dramatically.”
A flood of new issues and relatively weaker economic outlooks have had the opposite effect in some developed countries. Greece's government bonds were downgraded to junk status by Standard & Poor's last week, while emerging markets such as Brazil have seen credit ratings climb in recent years. By September 2009, all three major credit rating agencies — S&P, Fitch Ratings and Moody's Investors Service — had rated Brazil the lowest investment grade at BBB- up from BB+.
Many other developing countries have had credit upgrades in the past several years. S&P, for example, moved China up to A+ from A in 2008.
“The fundamentals of issuers in some emerging markets are a lot better than some of those in developed markets,” said Cameron Brandt, global markets analyst at EPFR Global. “Investors are also diversifying away from U.S. (government bond) exposure as a way of hedging against a widely predicted weakening of the dollar compared to emerging markets currencies.
“Yield hunger is certainly another factor.”