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Debt collection

10 minutes with…Brett Diment

Emerging market debt continues to grow in popularity, with funds attracting inflows of £33bn over the course of 2010 – almost seven times the amount taken in the previous year.

Aberdeen is among the most experienced players in what remains a niche area, with a decade-plus track record and £3.8bn under manage-ment and a further £3.1bn in Asian bonds.

Brett Diment heads the team, with 10 members across Europe and a division in Singapore covering all types of emerging debt, including hard and local currency sovereigns and corporates.

Diment’s flagship £628m emerging markets bond fund – Luxemburg-domiciled with an onshore mirror launched last year – invests across the whole EMD spectrum. Aberdeen’s process is very much research-focused, with the team meeting finance ministers and central bankers before investing in a country’s debt, just as equity specialists would a company’s CFO.

At present, the portfolio remains sovereign bond-dominated at around 65 per cent, reflecting the Govern-ment skew in the asset class.

However, Aberdeen also has around 20 per cent in emerging corporates and a further 10 per cent in quasi-corporates – typically state-owned companies – and expects this proportion to grow as the emerging credit space develops further.

Overall, Diment says the group’s long-standing positive call on EMD has slowly become consensus, with so many coun-tries in the region rebuilding their finances after suffering in the 1980s and early 1990s.

He says: “Many sovereigns in Latin America, for example, had very large fiscal deficits at that stage and governments simply got tired of going to external markets for funding.

“An overall policy to limit deficits through sound fiscal and monetary management has resulted in a structural improvement in credit-worthiness and served to reduce the historically high volatility of the asset class.”

Diment also highlights EMD’s significant diversifi-cation benefits – with low correlation to developed and emerging market equities – and the generally strong macro picture for the region. Arguments for the emerging block are well known, with positive demographics, econ-omic reform, improving gover-nance and increasing indust-rialisation all expected to drive growth in the coming years.

He says: “Emerging econ-omies are generally in better shape relative to developed peers and the average credit quality of emerging sovereign debt has increased steadily over the past 10 years.

“Today, over 80 per cent of the local currency index and 50 per cent of the hard currency is investment grade. Given their strong funda-mentals and relative appeal compared with G-7 fixedincome securities, investors should consider diversifying their portfolios into emerging market debt.”

This led Aberdeen to believe the sell-off in the asset class post-Lehmans was a severe overreaction, particularly as underlying macro problems remain largely in the West.

To benefit from this, Diment bought into oversold areas of the market such as hard currency Brazilian debt and Indonesian bonds, with performance benefitting as both rallied hard.

Heading into 2011, the team’s biggest exposure is to Mexico, where Diment says the peso currency is one of the few that has remained weak against the dollar, benefiting the region’s industry.

He says: “The peso is trading at around 12.5 to the dollar against 10 two years ago and this cheaper currency has helped the country regain its competitiveness against places such as China and some manufacturing has subseq-uently returned to its shores.

“Wages in Mexico were previously around three times those in China but this has fallen to just 15 per cent more as the peso has sold off and areas such as Mexican car production are currently running at record highs. The country has also reached an all-time-high level of imports to the US at 12 per cent and industries like textiles are coming back from overseas.”

Another favoured position for Aberdeen is South African rand bonds, currently yielding 8.5 per cent. The team says the country’s central bank is expected to keep interest rates on hold for most of 2011 and yields should therefore fall further against a favourable inflation background.


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