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Axa IM predicts strong returns for emerging market bonds

Axa Investment Managers believes 2014 could be the year of emerging market bonds.

Fixed income chief investment officer Chris Iggo says over the last 18 years, at least one bond sector has returned 10 per cent or more.

He believes a process of elimination suggests this year could be the turn of emerging market bonds.

Iggo points out high yield was the stand-out performer for four of the last five years, but he says is unlikely to continue this year. He also believes 10 per cent returns from developed world investment grade and peripheral eurozone government debt are doubtful. 

He says while emerging markets had a poor 2013 the sector could be positioned for a correction that may take total returns beyond 10 per cent.

The EM sovereign spread is 300 basis points above US Treasuries and EM corporate bonds are yielding about 5.25 per cent.

Iggo says: “If growth in the US continues at its current pace and China does not provide any further significant disappointments then some mean reversion of emerging market debt performance is likely.”

But Bestinvest managing director Jason Hollands says faster tapering of the US quantitative easing programme could strengthen the dollar and push up treasury yields. Hollands says as most EM debt is highly correlated to treasuries it could make bond repricing volatile.

He says: “The greatest volatility could well be in local currency EM bonds. But there are undoubtedly some valuation opportunities from bonds that have sold-off heavily in reaction to speculation over Fed moves.”

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