But demand for emerging market debt shows a diverging trend, with appetite surging in the first half of this year.
After yields on emerging market corporate and government bonds increased dramatically a year ago following the start of Fed tapering talk, appetite for the asset class diminished. As prices have come down now, fund selectors seem to slowly find their way back into emerging markets.
“We replaced our high yield allocation with emerging market debt early this year,” Rishma Moennasing of Rabobank in The Netherlands illustrates the trend.
French bulls
France is home to the largest proportion of emerging market debt bulls. Here, more than six in ten fund selectors plan to step up allocation to emerging markets corporate bonds. Some of them told Expert Investor Europe researchers they expect a good performance by emerging markets stocks will benefit credit, while they stressed companies there seem to be in better financial health now as they have been deleveraging following the start of QE tapering last autumn.
The lesser evil
Appetite for emerging market debt is higher than for all other long-only bond classes in almost all 13 countries surveyed by EIE. But this shouldn’t lead us to conclude that the asset class is again topping fund selector buy lists across Europe. It mainly means that emerging market bonds are considered a bit of a lesser evil than developed market bonds at the moment.
In most European countries, EM debt sentiment is net neutral. Significant numbers of bulls on the asset class are only to be found in France, Luxembourg, Denmark, Switzerland and Italy (for EM government bonds only). On top of that, many of the EM debt bulls our researchers have spoken to over the past months say they are still waiting a bit to step up their allocation.
