expect a GEM bubble sooner rather than later Jupiter's Bezalel

expect a GEM bubble sooner rather than later Jupiter's Bezalel ; Emerging market debt has been one of the most sought after asset classes this year as investors have looked to diversify away from the low returns on offer in the West, but some are growing increasingly wary that this wall of money is leading to a bubble forming in the sector.

The onset of a second round of quantitative easing from the Federal Reserve can only exacerbate this. Spreads on external emerging market debt in particular have already been compressed significantly this year, leading a number of fund managers to question whether there really is any value left in the market.

Ariel Bezalel (pictured), manager of the Jupiter Strategic Bond fund, says while he accepts the long-term argument that emerging markets are undergoing profound structural changes, investors have ‘short memories’ and should not just chase returns blindly.

‘A lot of this part of the world was pretty distressed just a decade ago,’ he says. ‘Obviously their debt position is much better than in the developed world in terms of current account surpluses and so forth, and while the bonds have performed, people have got to be very careful.

‘Will they really respect bondholder rights and is there the ability to enforce them? And have they got strong bankruptcy laws in place – many of these countries still have quite immature financial systems.’

Lack of risk premium

Bezalel points to the lack of risk premium on many emerging countries’ bonds, highlighting Indonesian dollar-denominated debt, which he says is now trading at just 100 basis points over Treasuries.

‘In October 2008, just after Lehman Brothers collapsed, the yield was 14% and it is now just over 4%. That is not much of a risk premium for a country that had a revolution just over a decade ago,’ he says. ‘A lot of the emerging market economies, such as Brazil, are very impressively managed but I do wonder if we are seeing bubble-like conditions.

‘We are seeing a lot of money going into hot places like emerging markets, exacerbating the problem. This is a powerful technical force that investors need to be aware of.’

Investec Asset Management’s head of emerging market debt Peter Eerdmans plays down the bubble fears, pointing out that the markets have been able to comfortably absorb the increased inflows into the asset class. He says that while pockets of external emerging market debt may be offering unattractive spreads, there is still value in local currency paper.

He notes that although spreads have come in from their 6.5% peak during the credit crunch, they are still at 4.1%, a little above their 3.9% average and considerably off the 2.8% record low seen in 2003 For the latest updates PRESS CTR + D or visit Stock Market news Today

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