Analysis: Politics store risk for emerging market yield - seekers

Thu Oct 4, 2012 8:04am EDT
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By Sujata Rao

LONDON (Reuters) - Investors rushing headlong to emerging markets in search of yield could find future returns under threat as economic downturns and income inequalities spur a rise in political risks.

Emerging markets have been the global success story of the past decade, with booming growth and huge investments eroding old memories of the coups, debt defaults and hyperinflation associated with these countries throughout the 20th century.

This year investors fleeing near-zero yields on "safe" Western bonds have propelled $50 billion into emerging stocks and bonds, according to fund tracker EPFR Global.

Governments and companies in emerging economies are set for a record-breaking year of bond sales as investors stampede to lend even to countries such as Zambia and Guatemala which are rated as junk by credit agencies.

On the face of it the enthusiasm seems justified.

Debt levels are a fraction of the norm in developed markets and growth is faster, yet yields are robust. While risk premia have plunged over the decade, emerging sovereign dollar bonds pay an average 3 percentage points over U.S. Treasuries.

Yet many such as Greg Saichin, head of emerging debt at Pioneer Investments, reckon premia in many markets no longer compensate for risks simmering just beneath the surface.

This week geo-political risk has escalated in the Middle East with Turkey embroiled in the Syrian conflict, while in South Africa violent labor protests are spreading.   Continued...