Posted inAbsolute ReturnEmerging Markets

Finns go contrarian with bet on EMD

Half of respondents will increase their investments in emerging market corporate debt while none of them are planning a further retreat. EM government bonds enjoy almost equal popularity as EM credit, with 44% of respondents increasing their allocation. This is by far the highest percentage in Europe.

Blessing in disguise

Finnish investors seem to regard emerging market debt as an attractive, higher-yielding alternative to developed market bonds, with the latter asset class remaining highly unpopular among interviewees. QE-tightening and turmoil in Ukraine, Thailand, Turkey and Venezuela have driven emerging market currencies down and triggered a sell-off. Some respondents told our researcher they see the low prices and competitive exchange rates that resulted from this as a buying opportunity, even more so since they currently have low exposure to emerging market debt.

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Russia fears

The same story might hold for equity investments in the region. European equities remain the most popular asset class, with sentiment almost unchanged compared to the previous survey in January. But 53% is planning to increase their allocation to Asia ex-Japan equities. With Finland having fallen victim to Russian aggression on several occasions in the past, it’s no surprise that almost all interviewees voiced their concern about Russia’s attitude towards Ukraine. As Russia is Finland’s most important trading partner and its third export destination, negative repercussions on the Finnish economy of possible economic sanctions are feared. One respondent, though, took a contrarian standpoint saying Russian stocks are already cheap now, expecting the point that it would be “difficult to resist the temptation” coming close.

Besides emerging market debt, absolute return also gained popularity as an alternative to traditional bond investments. 53% of respondents will increase their allocation during the next twelve months, up from 33% in January. 

 

Part of the Bonhill Group.