Emerging-Market Debt Boom Signals End of Crisis

Oct 13, 2009 - Investors are throwing money into the riskiest of emerging markets at a stunning pace, buying as if the global financial crisis is history.

The sovereign credits of Argentina, Ecuador, Pakistan and Ukraine have risen more than 100% year to date on benchmark JPMorgan's Emerging Market Bond Index Global, or Embig. Other impressive gainers include the Dominican Republic, Ghana, Iraq, Serbia and Venezuela.

Investors and market analysts aren't sweating yet. Many say the levels are reasonable, and there is even potential for further advances. A big correction isn't likely, they add, though a modest one is possible. They point out the gains appear outsized given the historic plunges a year ago. Clearly, the problem has gone from, 'What do I sell in order to raise the cash I need?'...to, 'Oh my gosh, where do I put the cash that's being thrown at me,' said Michael Gavin, head of emerging-markets strategy at Barclays Capital. The focus turns from fears of downside risks to upside potential. Mr. Gavin said Barclays Capital doesn't believe current levels have risen to bubble-like levels, but the odds are very high that we will. So far this year, Argentina has advanced 136% on the Embig, while Ukraine rose 112%, Pakistan rose 163% and Iraq gained 94%. Overall, the index has gained 28% this year.

Ultimately, Mr. Gavin and others say, asset prices are defensible, particularly as many sources of money have yet to re-enter the market in full position, including hedge funds and individual investors. The move in these low-grade bonds, which some call junk, comes amid a broad repositioning into riskier assets, including commodities and investment-grade emerging markets such as Brazil.

Emerging-market funds have absorbed more than $40 billion so far this year, according to fund tracker EPFR Global.That means that last year's outflow of $40.1 billion has been completely erased said Andrew Howell, an emerging-markets strategist at Citigroup. We tend to get nervous when inflows surge, suggesting excessive optimism. However, at this point it seems early to get too worried.