Emerging market portfolio managers are struggling with a dilemma that European banks and other battered participants in the global financial system would love to have: what to do with a pile of excess cash.
Genuinely confident in the long-term outlook for their asset classes, most fund managers are grappling with whether to put their money to work now or to wait for the current turmoil in world markets to drive assets to cheaper levels. There’s another wild card too, one that is also independent of the fundamental outlook for emerging markets: the risk of redemptions as fund investors respond to the global turmoil by cashing out.
“Investors, currently, are facing a conundrum,” said Dennis Eisele, director of emerging markets syndicate at Deutsche Bank in New York. “No one wants to get caught short if the market rallies, yet no one wants to mistime their entry.”
Emerging market assets have taken a hit like everything else amid the political turmoil in Greece in Italy of recent days, with J.P. Morgan’s benchmark Emerging Markets Bond Index Global Diversified 12 basis points wider at 398 basis points over comparable Treasurys on Wednesday. But in general, emerging market Fund managers don’t seem too scared by Wednesday’s market dramatic selloff.
With their strong cash positions, these investors are in it for the long haul, and prepared to ride out bumpy stretches, even as Greece’s political transition raises the prospect of major default and as Italy’s bond yields spike above 7%. What they can’t prepare so easily is for individuals who put money into their mutual funds to ask for their money back en masse, much as they did back in September.
“Redemptions are still a worry,” said Michael Lee, co-manager of the Wells Fargo Advantage International Bond Fund with $1.7 billion under management. “In these times of illiquidity and volatility, we have to just ride that wave.”
While Lee says he hasn’t seen redemptions from his company’s funds, fresh data from EPFR Global Inc. due Thursday will capture what these individual investors did across the asset class. Last week’s data showed that on the back of the relief rally after the euro zone’s rescue plan for Greece, emerging market bond funds saw inflows of $671 million between Oct. 27 and Nov. 2. That relief likely gave way to fear again last week as the political machinations in Athens stoked concerns about a disorderly default from Greece and as the focus turned to the fate of Italian Prime Minister Silvio Berlusconi and of his country’s $1.9 trillion debt market.
For now, though, individual emerging market investors don’t seem overly fazed, as evidenced by the funds’ sizable cash holdings. Fund manager DoubleLine, for example, held 3.31% cash in its $185 million Emerging Markets Fixed Income Bond Fund as of Sept. 30.
Meanwhile, investment offerings in the emerging market world have been growing too as bond managers seize opportunities that offer concessions to existing bonds. In October, there was $17 billion in new bond issuance, and borrowers brought more deals to the market over the past week, albeit in dribs and drabs. They sold all of them with little trouble–another indication of investors’ sanguine view of emerging market assets.
On Tuesday, for instance, the Dominican Republic sold $250 million more of its reopened 2021 bond at 6.825% within an hour of announcing the issue, while the Republic of Lithuania sold $750 million more of its reopened 2021 bond at a yield of 5.947%.
The rest of this week is not expected to see much in issuance, but starting Monday, volumes could surge as issuers wind up deals they wanted done this year. Prospects include Romania, Qatar, and the world’s largest gas producer, Russia’s Gazprom.
Those sales could test the market’s resolve but evidence suggests investors’ concerns don’t lie with the risks associated with emerging market debt per se. Many of these economies are growing–albeit more slowly–face likely ratings upgrades, and have low debt levels relative to GDP. So while volatility is on the immediate horizon, there’s a long-term base of support for these markets.
“There’s a strong case for emerging markets,” said Wasif Latif, vice president of Equity Investments at USAA, who oversees $15 billion in assets and overseas international markets. “The developed world, without a doubt, is going down.”
By Prabha Natarajan, Dow Jones Newswires