Emerging market debt has been the best-selling asset class among European investors year-to-date, according to Morningstar fund flows. And anecdotal evidence gathered by Expert Investor backs up Morningstar’s data. Not all investors in Europe have gone big in emerging market debt, but the vast majority seem to be overweight.
“We are close to our maximum allocation to emerging market debt at the moment,” Robert Schuckink-Kool, CIO at the private bank Wijs & Van Oostveen in Amsterdam, told Expert Investor.
“At the start of the year, we had the conviction that emerging market debt provided better value for money than high-yield bonds, so we sold some of the latter and bought the former,” he said.
At a media briefing last week, Ashmore’s head of research Jan Dehn argued emerging market debt flows had only just started to pick up, referring to the inflows his own company, a specialist emerging market manager, had seen.
“In March, we had our first net inflows in 17 quarters,” he said, arguing that Morningstar mainly captures flows from the wholesale sector. “The big institutional flows haven’t yet started. I’m looking at a five-year recovery story for EM, which has only just begun,” he added.
"A systemic threat to emerging market debt can only come from China" - Pierre-Yves Bareau
But JP Morgan AM’s head of emerging market debt, Pierre-Yves Bareau, says institutional investors have been adding to their allocations this year, alongside retail investors.
“After the Taper Tantrum in 2013, retail investors stopped buying and switched to equities, but institutional investors have used the dips in the asset class to buy more. Pension funds still need bonds because of their liability requirements.”
A year ago, the retail side started engaging with emerging market debt again, said Bareau. “After Brexit, investment accelerated. We have had one of the best years of inflows ever, quite evenly split between institutional and retail.”
According to Morningstar data (see chart above), investors have been adding more than net €40bn to their emerging market debt holdings since June 2016, and this excludes the flows into mandates that Dehn mentioned.
But what are the odds that inflows will continue at this pace?