Fake News Alert: "Emerging Market Debt is too risky" | Discretionary Asset Manager - Aberdeen Asset Management
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Fake News Alert: "Emerging Market Debt is too risky"

Date: 10/07/2017
By Kevin Daly, Senior Investment Manager, Fixed Income

Financial publications have often highlighted the negative aspects of investing in emerging markets, which plays on the fears of risk adverse investors.

Whether it's end of democracy in Turkey, another political scandal in Brazil, or the risk of further economic sanctions on Russia, the reality is that these are the type of headlines that the media love to embrace. After all, they want to grab the attention of the audience, and what better way to do that than to claim there's another crisis brewing. Quite often, investors are not buying their 'doom and gloom' message. There's a simple reason for that: investors have become much more seasoned to political risk, which can often present an attractive buying opportunity.

The reality is that emerging markets is one of the few areas where investors can find yield with low default risk.

Sure, there will be increased volatility at times, but that comes with every asset class. Political risk is part and parcel when it comes to investing in emerging markets, but what really matters is debt sustainability.

So next time you come across a story about another emerging market crisis, remember this: Fake News.

A closer look at Turkey

The downgrading of Turkey from investment grade to speculative grade (or ‘junk’ status) at the beginning of 2016 saw many investors head for the exit. While headline risk has been elevated over the last year, this has only improved valuations. South Africa’s 10-year Eurobond is a good illustration: despite being rated as investment grade, the bond has worse credit metrics than Turkey’s 10-year Eurobond. Markets are rarely efficient, especially in areas such as emerging market debt, and there are often opportunities to gain exposure via some very attractive entry levels.

Turkey is not without its risks, something we readily acknowledge. However, when faced with collapsing growth and a rapidly depreciating currency, as well as rising inflation following the failed coup attempt, it was encouraging to see the country respond well. The combination of fiscal loosening and monetary tightening was straight out of the economic textbook. This policy mix and the supportive global environment put the country in a sweet spot, allowing time to implement much needed structural reforms to improve its potential growth rate and ensure sufficient job creation to accommodate its growing work age population.

Data doesn’t often lie and the latest set reveals the economy continues to move in the right direction. Strong export performance, robust public spending and the government’s loan guarantee fund deserve a mention, while the tourism sector is also rebounding.

However, the constitutional referendum failed to remove political uncertainty, and hence private investments has so far failed to rebound. A key risk is that the government under-delivers on reforms, meaning they would continue to rely on large-scale infrastructure projects to support growth after the impact of the fiscal stimulus rolls off late in the year. Given the limited fiscal and monetary space, the administration might be forced to revert to more unorthodox measures. This might include leveraging up the Turkish economy and undermining sustainability.

Against these longer term concerns, markets seem to have overpriced political risk in the shorter run. While the state of emergency will remain in place, early elections will not  be called this year, while a much anticipated government reshuffle might open the way for economic reforms.

The economy is still grappling with uncertainty, but it’s not in bad shape and Turkish debt is not to be snuffed at.

The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested.

Important information

The above marketing document is strictly for information purposes only and should not be considered as an offer, investment recommendation, or solicitation, to deal in any of the investments or funds mentioned herein and does not constitute investment research as defined under EU Directive 2003/125/EC. Aberdeen Asset Managers Limited (Aberdeen) does not warrant the accuracy, adequacy or completeness of the information and materials contained in this document and expressly disclaims liability for errors or omissions in such information and materials.

Any research or analysis used in the preparation of this document has been procured by Aberdeen for its own use and may have been acted on for its own purpose. The results thus obtained are made available only coincidentally and the information is not guaranteed as to its accuracy. Some of the information in this document may contain projections or other forward looking statements regarding future events or future financial performance of countries, markets or companies. These statements are only predictions and actual events or results may differ materially. The reader must make their own assessment of the relevance, accuracy and adequacy of the information contained in this document and make such independent investigations, as they may consider necessary or appropriate for the purpose of such assessment. Any opinion or estimate contained in this document is made on a general basis and is not to be relied on by the reader as advice. Neither Aberdeen nor any of its employees, associated group companies or agents have given any consideration to nor have they or any of them made any investigation of the investment objectives, financial situation or particular need of the reader, any specific person or group of persons. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the reader, any person or group of persons acting on any information, opinion or estimate contained in this document. Aberdeen reserves the right to make changes and corrections to any information in this document at any time, without notice.

Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom

Risk warning:

Risk warning

The value of investments and the income from them can go down as well as up and your clients may get back less than the amount invested.

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