Continued long-term growth in emerging local currency debt
| 19 August 2009 |
| Press release London - With the third anniversary of the sector-leading PF(LUX)-Emerging Local Currency Debt fund firmly under his belt, manager Simon Lue-Fong continues to see opportunities in emerging debt, while recognising short-term vulnerability in the markets. |
 "Emerging market debt held up well relative to other asset classes in 2008 and in 2009 has performed strongly as global financial markets have rallied. Other asset classes may find it difficult to maintain these levels in the near-term," says Simon Lue-Fong. "Sentiment continues to improve and there have been positive surprises in terms of domestic demand and export data in some emerging countries. This, along with IMF support and continuing inflows into emerging markets, is helping to boost asset prices, even if the market remains susceptible to weak economic data. The focus on the need for new global economic architecture to reflect the increased importance of emerging markets has been recognised both on a political and financial level. Therefore, while we remain cautious in the immediate term, we are confident that the medium to long-term investment case remains intact." |
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"We have reduced the portfolio's long-duration bias as emerging central banks appear to be near or at the end of their rate cutting cycle as growth data begins to surprise on the upside," adds Lue-Fong. "The portfolio has a long bias to emerging market currencies, with tactical long positions across all three regions. Different markets are still showing high differential performance and we continue to look for interesting opportunities in relative value trades." Pictet Asset Management has been managing emerging debt portfolios for over a decade and the team currently manages USD2.2 billion in assets (31 July 2009). "Developments in the asset class give us confidence that emerging local currency is a very promising business. Even in the depths of the financial crisis, emerging local currency debt trading volumes remained above those of emerging USD debt. Liquidity is generally better and coverage continues to improve,"says Lue-Fong. "As emerging country fundamentals strengthen, governments will be compelled to develop their domestic financial systems and issue debt denominated in their own currency, not only because it is potentially cheaper, but in order to open this market for domestic corporate financing." |
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"Local investors, in particular pension funds, provide natural buyers for these instruments. Together with the prospect for increased allocation to emerging local currency debt among international investors, the net demand dynamic is likely to remain extremely positive," explains Lue-Fong. Despite the market turmoil in 2008, emerging market debt has managed to provide annualised returns in the region of 15% since end 2001. Diversification benefits are attractive, with correlations to other asset classes remaining relatively low, while high sharpe ratios indicate that despite higher volatility in emerging market local currency debt, the return for each unit of risk is high. At 31 July 2009, PF(LUX)-Emerging Local Currency Debt had returned a cumulative 52.7% (15.21% annualized) in USD since inception on 27th June 2006, on a gross dividends reinvested basis, substantially ahead of the 44.2% gain (12.61% annualized) in the JP Morgan GBI-EM Global Div. Comp. Index (1). The fund had total net assets of USD373 million at 31 July 2009 and is available in I, P and R share classes denominated in USD, EUR and GBP both hedged and unhedged. The PF(LUX)-Emerging Local Currency Debt fund maintains a strategic index exposure while active positions aim to provide positive incremental returns over the benchmark in all market conditions. Pictet's emerging debt business model was put to the test in 2008 and was shown to be the correct one: a well-resourced team with regional expertise, a process that uses both top-down and bottom-up analysis with a focus on timing and disciplined portfolio management. The defensive positioning of the portfolio during this period helped limit the downside and the fund is one of the top performers among its peer group. (1) 26 Jun 2006 to 31 Mar 2007 JP Morgan GBI-EM Broad Divers. |
