EM News: EM Corporate Debt Offers Yield


By Gordon Platt

Investors are showing increasing interest in emerging markets’ corporate bonds, which offer diversification and better yields, according to a report by Bank of America Merrill Lynch.

The firm held an emerging markets investor conference in Washington, DC, on the sidelines of the fall meetings of the International Monetary Fund and World Bank.

Companies prefer to raise funds in local currency in order to match assets and liabilities, the report says. Until recently, companies have focused on dollar-denominated bond markets to raise long-duration funds and diversify their investor bases. “However, we are seeing increased interest from emerging markets investors in buying local currency corporate bonds,” BofA Merrill Lynch Global Research says.

Emerging markets equity funds suffered big outflows this summer, as fears grew of a double-dip recession and a second credit crisis linked to the eurozone’s debt crisis, according to EPFR Global.

Given higher interest rates in most emerging markets, investors in corporate debt “can get higher yields for what is, for the most part, an investment-grade asset class,” BofA Merrill Lynch says. The problem, however, is that foreign investors may encounter regulatory and capital controls that make it difficult to access these markets.

As a result, the firm says, there has been an increase in global bonds issued in local currency, particularly in Latin America. Changing regulations to allow greater foreign participation in local emerging markets will take time, it adds.