Investors Favor Emerging Debt Over US

(Bloomberg News) Global investors
managing more than $500 billion are buying emerging-market debt and
shares of well capitalized companies to avoid the European debt crisis
and low-yielding havens such as U.S. Treasuries.

“Balance
sheet strength is a big theme for us at the moment,” said Anne Richards,
chief investment officer at Aberdeen Asset Management Plc, which
oversees 185 billion pounds ($288 billion). “Many European equities are
high risk while we are also nervous about U.S. Treasuries, which look
overvalued.”

Surging
borrowing costs for Italy and Spain, Europe’s third and fourth-biggest
economies, have pushed up prices of traditional haven assets such as
10-year Treasuries and German bunds, which are offering negative real
yields. That’s leading investors who met this week at the annual Fund
Forum conference in Monaco to look to emerging markets for capital
preservation as well as growth.

“People are
underestimating the health of Asian issuers,” said Richards, who is
buying Indonesian sovereign debt, Latin American corporate bonds and
gold to guard against major shocks in Europe. For growth, Aberdeen fund
managers favor European stocks with strong balance sheets and customers
in emerging markets such as HSBC Holdings Plc.

Jim
McCaughan, chief executive officer of Principal Global Investors LLC,
which manages about $250 billion, agrees there’s “not much point” in
buying U.S. Treasuries at current yields. He prefers emerging-market
debt and equities along with U.S. commercial property yielding 6 percent
to 7 percent.

“The euro
zone will be a source of volatility and a headwind probably for a few
years to come,” he said. There is a 25 percent chance Europe’s leaders
fail to deal with the crisis or get voted out of office and replaced by
nationalist politicians who reject the euro, McCaughan said. That would
cause Europe’s economy to contract by between 5 percent and 8 percent in
a year, he said.

The European
Union summit, which started yesterday, comes a week after 10-year
borrowing costs for Spain, the euro zone’s fourth-largest economy, first
reached the 7 percent level that prompted euro members Greece, Ireland
and Portugal to seek bailouts.

Euro-area
leaders including German Chancellor Angela Merkel agreed to ease
repayment rules for emergency loans to Spanish banks and relax
conditions on possible help for Italy after 13 ½ hours of talks ending
at 4:30 a.m. in Brussels today. Even so, the leaders struggled for
consensus on reducing market pressure on Italy and Spain.

Short of
satisfying Germany that fiscal and structural reforms are in place,
Europe’s weaker countries may have to wait until a “major event” spurs
Merkel into taking “bolder steps,” according to Jose Antonio Blanco, the
chief investment officer for Europe at UBS AG’s Global Asset
Management. UBS GAM has 80 billion Swiss francs ($83 billion) under
management.

Blanco, who
can only hold European assets, said he’s keeping more of his funds in
cash because there’s a lack of safe investments in Europe and he wants
to be ready to invest when leaders agree measures to stem the crisis.

“After any
sign of significant action, we expect markets to rally so we’re holding
cash to maintain maximum flexibility,” he said.

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Friday, June 29th, 2012 EN

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