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Threadneedle Peta in praise of RM corporate debt

Threadneedle Investments is seeing greater investment potential in emerging market corporate debt than in its developed market counterpart, according to John Peta, head of global emerging markets fixed income strategies at the company.

“EM fundamentals, in terms of inflation and credit-quality remain unchanged,” Peta said.

“As the dust settles [on the turbulence now under way in many markets], the attractiveness of the current spreads will support the performance of the EM corporates.”

Peta made his comments yesterday during  International Adviser’s  Expert Investor Forum in Singapore.

They also come in the wake of a period of poor returns for the emerging market fixed income sector. According to Peta, the EM fixed income asset class has been posting notably poor returns, amid large outflows, since May, when talk that the US was considering tapering off its programme of quantitative easing, which the Federal Reserve has been using to inject money into the US economy.

Emerging market local rates of about 6.43% are “still at substantial premium” to 2.73% in US and 1.95% in Germany, Peta noted.

“Panic [over the possible QE tapering] has subsided, but the effects of the sell-off are lasting, and this is an important inflection point to assess the asset class,” he added.

Peta said he expects the emerging market fixed income sector to rebound from current levels over the next few months – returning 2% to 4% for the rest of the year – though returns will likely remain negative for the full year.

The much-awaited QE tapering will “probably occur” sometime in December, Peta believes, and he adds that the delay will mean that  it won’t have “as much of an impact” as if it had happened in the summer, as the markets initially feared it would. In such a case, “yields are likely to rise gradually”, he said.

He predicted the yield on US 10-year Treasuries to be at 2.85% by year-end, and to rise further, to 3.25%, by mid-2014.

Threadneedle’s access point

For investors interested in accessing the global emerging market, Peta suggested the Threadneedle (Lux) Global Emerging Market Short-Term Bonds Fund might be one to consider, as it is designed to control risk in a low, or rising, interest environment.

For others, there’s the Threadneedle (Lux) Emerging Market Corporate Bond Fund, which according to Peta, offers investors exposure to a “dynamic” asset class of EM corporate debt, with a focus on credit with “strong fundamentals” that he said also maintains a “good” level of diversification across countries, industries and issuers.

The short-term fund with duration of 3.1 years and yield-to-maturity of 5.82% while the emerging market corporate bond fund has duration of 3.9 years and yield to maturity of 4.9%.

The emerging market corporate bond is overweight Russia, United Arab Emirates, Brazil and Turkey – due to stable outlook and attractive valuations, Peta said – and Venezuala, on the back of structural changes there, and the potential for currency devaluation.

It is underweight India, due to that country’s currently weak macro-economic environment, Peta said.

Ameriprise Financial investment arm

Threadneedle Investments is the London-based, international investment management arm of New York Stock Exchange-listed Ameriprise Financial, which the company says is one of the world’s 40 largest asset management firms. In the US it is a major financial planning services provider.

At the end of June, Ameriprise had some $703bn in assets under management and administration, according to the company’s website.

Part of the Mark Allen Group.