Rob Drijkoningen: From a structural point of view, there is a focus on emerging markets because they are not as affected by the sovereign aid crisis as the developed world. It was an eye-opener for many to see that emerging markets were better positioned to deal with the crisis in 2008/2009 than the developed world. Until then, many saw emerging markets as more opportunistic and perhaps not as a strategic asset class. Of course, the level of volatility in the developed world was unheard of and no business model in the developed world discounted the possibility of the scenario that unfolded for the economy or the companies involved. Yet, it was part of the business model that emerging markets takes into account.

Edwin Gutierrez: I agree with Rob on how well emerging markets coped with the crisis. Looking forward over the next three to five years, it is a consensus that global growth will come from emerging markets. We are looking at core developed markets with high debt to GDP fiscal policy, which at some point is going to have to tighten significantly and we have already seen it in many countries. That is going to be very depressing and dampening on growth, whereas emerging markets have much more flexibility because their growth is not constrained by these high debt levels. I think that is one of the main reasons why there is a lot of money being allocated to the asset class. For a lot of institutional investors, the cash is still there, liquidity is very much still at an all-time high and what does one do with that marginal dollar or marginal euro? Do you want to invest it in developed markets or in emerging markets? The case for emerging markets just seems a bit more compelling at this point in time.

Jari Eskelinen: Also, the structure has developed in some of the emerging markets. Early on during the crisis, there used to be a situation where foreign exchange (FX) was selling off and the rates were selling off, especially on the local side. Now some, but not all, of the emerging markets are reacting differently: when the FX was selling off, during the crisis they were able to lower the rates, which then makes the returns more stable and what you are losing on the FX side you might gain on the rates side. Not all of the countries, but some of the larger ones are reacting more like the developed markets.

Rob Drijkoningen: Yes, it is interesting that some of the dynamics we have used in emerging markets have to be applied to developed markets and some of the dynamics of developed markets are starting to be seen in the emerging space. What Jari is referring to is very much a function of the credibility of the policy setting. They have earned a degree of freedom in the policy setting and have been able to address policy and gear it towards domestic needs rather than international capital flows. That has been one of the reasons why the comeback in growth has been far stronger in emerging markets, because the domestic concerns could be addressed.

nrpn: What do you think has triggered the recent interest in emerging market debt (EMD)?

Jari Eskelinen: People are scared about equity risk and are looking for something else.

Edwin Guiterrez: They are tired of losing money in core developed markets. As Jari said, the relative stability of the currency has helped. It has provided new opportunities, but even for hard currency sovereign debt it has provided some stability as you do not have to worry about maxi devaluations because, generally speaking, they have put their houses in order.

Jukka Järvinen: I think another reason is that investors want to diversify their portfolios much more.

Rob Drijkoningen: Sometimes the regulatory regime creates an incentive to look at risky assets within fixed income. It is also clear that quite a wide set of investors are not used to looking at fixed income as part of the risky asset base. That is why some risk premiums have been relatively high in emerging markets, because it did not fit into the standard pattern of thinking about fixed income versus equities. Typically, you see a tendency to consider fixed income as a safe asset and equities as risky assets, and whenever you are bullish you move towards equities. To some extent, investors do not have the mindset to deal with a 5 per cent loss on an instrument or a portfolio that is invested in EMD. Yet if equities go down 20 per cent, they think it is all part of the business. That has probably created some excess risk premiums in EMD, which has made it a very tempting asset class for those who had the commitment, the participation and the understanding of the drivers and the potential of being invested in the asset class.

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