US demand emerges for EM corporate bonds

Global investor appetite for emerging market corporate bonds is on the rise, notably among US pensions – a positive for an asset class traditionally seen as too illiquid by retirement funds, says Aberdeen Asset Management.

A case in point: the UK firm recently met with a US pension fund aiming to secure a $250–300 million mandate for its emerging market corporate bond strategy.

While European institutions have been investing in these strategies for some time, this is the first time Aberdeen is seeing institutional demand in the US, says Kevin Daly, portfolio manager for emerging market debt.

“We’re starting to see pension fund demand for emerging market corporate bonds,” he tells AsianInvestor. “It’s a good sign that the market is becoming a stand-alone asset class, and US institutions are now looking [at EM corporate debt].”

One thing that has helped spur this interest from American pensions is that consultants in the US are “very much on board with EM corporate debt”, adds Daly.

He declined to name the pension fund or offer specifics about when Aberdeen may secure the mandate.

Before 2007, large investors typically shied away from EM corporate debt, viewing the markets as too small and illiquid. However, EM issuers stood up reasonably well during the last financial crisis, a clear signal of their "strong health", Aberdeen argues, adding that EM corporates are “fundamentally strong and operate in stable macroeconomic environments”.

Aberdeen estimates the EM corporate bond universe has grown threefold over the past five years as confident investors continue to pump money into the strategies. These markets, now estimated at $1 trillion globally, are set to grow by over $100 billion per year.

Aberdeen’s EM corporate bond portfolio is roughly 25% invested in Asia and is managed by Esther Chan.

Japanese investment into emerging market debt is also likely to increase this year, though at a much slower rate than into equities or real estate, Daly says. So far, Japanese investment into EM debt “has been a trickle”, he says. “It’s nothing significant. They prefer Asian equities to fixed income.”  

However, as the Japanese government continues its aggressive monetary easing, fiscal stimulus and support measures designed to boost economic growth, Aberdeen expects Japanese insurers, institutions, pensions and high-net-worth individuals to invest more in EM debt this year.

“The big wild card for emerging markets this year is the quantitative easing in Japan,” Daly says, adding that the yen devaluing will have positive implications for EM debt as investors seek to make money offshore.