High Volatility Drives Investors to Emerging Markets
The recent news that the European Union will commit, with assistance from the IMF, upwards of $1 trillion to stymie financial panic created by massive public deficits in the PIIGS, most prominently Greece, has helped calm anxious investors. However, couple this fundamental issue in credit markets with a “flash crash” in U.S. equity markets, and investors across the globe have been an unwilling participant on a financial rollercoaster. While this volatility may have some investors lining up at the world’s first gold-vending ATM for what many consider the safest investment in times of high volatility, some money managers are turning to the very markets where volatility is prevalent.1
Emerging markets have historically suffered more than their developed counterparts during economic turmoil. However, many industry professionals believe this dynamic is changing as emerging markets begin to drive global demand. Furthermore, many emerging countries have seen their credit ratings increase, which has attracted more investors worldwide and increased demand for sovereign debt.
Because their financing needs are relatively modest, many of these nations have no need to offer massive quantities of debt to cover public spending. As such, a shortage in the supply of emerging market debt is appearing due to the unmatched increase in demand. Because of these trends, many investors see huge opportunity in the bond markets of emerging economies.2
An example can be seen in the actions of a prevalent London-based hedge fund manager. The firm is shifting the focus of its Special Situations Fund (which returned an impressive 45.3 percent in 2009) to capitalize on the investment opportunities present in emerging market debt.3
However, this firm is not the only investor increasing its focus on emerging market credit; money is pouring into the market at a record pace. Thus far in 2010, $24 billion has flooded the emerging economy debt market. This is already an annual record, but with over half of the year remaining, JPMorgan Chase estimates that this number will top $40 billion before the ball in Times Square drops again.4
Echoing these industry trends, BHA analysts have seen strong demand for emerging market debt funds during the second quarter. Thus far, 46 hedge fund investors have specified an interest in the area. A London-based fund of hedge funds has a specific interest in an Asia-focused credit fund because it feels there is unique opportunity present in the distressed space.
Should volatility persist in public equity and bond markets, it is possible that the trend toward low-yield, emerging market debt will continue for some time.
1 International Business Times, “UAE opens world’s first gold ATM,” May 14, 2010.
2 The Wall Street Journal, “Emerging Markets’ Low Yields Still Find Fans,” May 6, 2010.
3 Financial Times, “Finisterre to shake up special situations fund,” May 16, 2010.
4 The Wall Street Journal,” “Emerging Markets’ Low Yields Still Find Fans,” May 6, 2010.