Emerging markets sell-off may provide opportunity
By Davide Scigliuzzo
NEW YORK, Dec 19 (IFR) - Emerging market bonds fell victim to indiscriminate selling this week, as weak oil prices and low liquidity sent investors running for cover ahead of potential redemptions.
At its nadir on Tuesday, the sell-off had wiped out two-thirds of the gains achieved by emerging market sovereign bonds so far this year.
Total returns on the EMBI Global Diversified Index were down to 3.5% on Tuesday from around 9.5% at the end of November.
Exacerbated by the lack of liquidity in the market towards the end of the year, the drop was so pronounced that EM sovereigns did even worse than US high-yield in the first three weeks of December - in spite of the latter's strong exposure to an embattled energy sector.
"I suspect some of the overreaction had to do with portfolio managers anticipating outflows and having to raise cash," said Gorky Urquieta, co-head of emerging markets debt at fund manager Neuberger Berman. "But on a medium-term horizon, investors are going to look at this from a different perspective."
Comforted by solid returns in the first 11 months of the year, some portfolio managers might have been caught off-guard by the sudden deterioration in the asset class.
"We had a pretty good rally up to November and cash levels were on the lower side," said Sergei Strigo, head of emerging market debt at Amundi Asset Management in London, who reckons fund managers have increased their cash holdings to between 5% and 10% of total assets to cushion against potential redemptions.