There is also the rising interest rate story, which may yet play out this year as markets wait for the US Federal Reserve’s Janet Yellen to make the first call to hike the rate.
Ms Calich points out: “In Indonesia it was encouraging that the government took advantage of the oil price fall to reduce the subsidies it was paying for fuel usage in the domestic economy, which has positive implications for its budget deficit.
“The prospect of a rising US interest rate also presents a headwind for emerging bond markets, although my expectation is that some regions, such as Asia, should prove less sensitive to outflows to the US than other main regions, such as Latin America.”
David Oliphant, head of investment-grade credit at Threadneedle Investments, does not expect any meaningful returns in government bonds in 2015, but he predicts that spreads will tighten in investment grade.
He notes: “In the inflationary recovery scenario, total returns in investment grade would be affected by rising government bond yields due to the longer duration nature of this asset class. We would expect to see high-yield and emerging market debt deliver better returns in the slow growth and inflationary recovery scenarios.”
Ellie Duncan is deputy features editor at Investment Adviser
EXPERT VIEW
Roy Scheepe, senior client portfolio manager at ING Investment Management, gives his view on investors’ perceptions of emerging market debt as an asset class:
“It is a mixed picture. Investors in general like the yield level of emerging market debt bonds and acknowledge the good historic investment [risk-adjusted] returns. Valuation versus other fixed income asset classes is deemed attractive as the search-for-yield theme is still an important driving force.
“On the other hand, they are also somewhat fearful about the volatility of the asset class, especially with regard to emerging market currencies, which have dropped significantly in the recent past.
“We expect that depending on relative valuations, we will continue to see inflows into and outflows from the emerging market debt asset class during the year.”
Emerging market countries: How policymakers have improved creditworthiness
• Reduction in external debt levels
• Liberalisation of fixed exchange rate regimes
• Build-up of significant foreign exchange reserves
• Adoption of inflation targeting
• Recognition of the importance of medium-term fiscal targeting as a key policy anchor
• Enhancement of the rule of law, corporate governance and international accounting standards
• Targeted development of domestic capital markets
• Removal of barriers to trade and to free flow of capital
Source: ING Investment Management
