Jesper Kirstein: I can definitely confirm that. As consultants, we do manager searches – usually about 10 searches a year in total for all asset classes. But in the last six months, we did five searches for emerging market debt only, which is amazing. It is by far the asset class that has attracted the most attention from institutional investors. I have never experienced a concentration of searches in any asset class like we have in emerging market debt right now. I was in Finland recently and spoke to some large investors there, and I can definitely confirm that there is some very strong interest in emerging market debt from Finnish investors. I would say that Danish and Finnish investors have been the quickest to pick up on the asset class, but the interest is also strong in Norway and Sweden.

Kristina Najjar: I agree. This is certainly a new trend from a business development point of view. We are participating in more emerging market debt searches than we previously have and are seeing a lot of activity within the asset class. Clients have spent the bulk of the past year reviewing and making changes to their equity portfolios, much in favour of emerging markets. Now the trend seems to be a shift towards fixed income and within that emerging debt.

Henrik Franck: It is not surprising that there is more interest now in emerging market debt because, in general, there is more room for risk in institutional investors’ risk budgeting. Looking at emerging market fundamentals and comparing emerging markets to five or 10 years ago, yields and spreads are at about the same level, yet fundamentals have drastically improved. What traditionally characterises emerging markets is high inflation, high public debt and high foreign debt. I would argue that today, problems with excessive public deficits and foreign debt is as much a developed market issue as for developing markets. Yet, you can buy emerging market debt at a spread of more than 300. It is, then, obvious that it is attractive.

Brett Diment: I do emerging market debt, so I have an inherent bias towards the asset class, but one thing that has certainly changed is people’s risk perception of the asset class. That is partly a function of the fact that the asset class continues to move upwards in ratings. It is now an investment grade-rated asset class in terms of the JP Morgan Dollar Indices. That is a function of the fact that many Latin American countries had such dreadful problems with external debt in the 1990s and no longer wanted to rely on foreign capital markets. There was a real social consensus around that. As the asset class has improved, people’s perception of developed markets has deteriorated, with the issue around sovereign indebtedness.

Henrik Franck: While it is important that the perception of emerging markets has changed, it is equally as important that the perception of developed markets has deteriorated quite dramatically.

Brett Diment: A lot of people’s latent biases against emerging markets have changed. The world has become a lot more globalised than it was 10 years ago.

Anders Schelde: That is absolutely true in terms of emerging markets being a major trend. Emerging market debt combines two trends that we have seen over the last year: first, the realisation that the risk is different in relative terms for emerging markets; second, the move into credit. Investors have moved into credit in many ways, and emerging market debt combines those two major trends.

Jesper Kirstein: One issue is that, last year, you could invest in high yield loans. That was the easy game. Now the party is maybe not completely over, but at least some people have left it. Those who have been invested in credit are now maybe moving further into emerging market debt.

nrpn: How would you say the perception of emerging market debt has changed?

Peter Lindegaard: In 2008 and early 2009, when we saw the meltdown of the financial markets, a lot of people thought emerging market debt was very dangerous in the sense that when we had previously seen upheavals, this was the asset class that was worst hit. Many people either left that market or did not touch it during that period. One of the reasons why it is very popular now is that people realise that the world has changed, because nothing really happened in emerging market debt compared with previous periods. That convinced people that this was something they should look at more closely.

Henrik Franck: It is mind-blowing that 11 months ago, emerging market debt was trading at 800 basis points over. Now, it is trading at 300 basis points over. There was a traditional reaction in spite of the tremendous fundamental improvement. I would say that, in terms of the financial crisis and the reaction on public finances, emerging markets in general are in much better shape, yet we saw the knee-jerk reaction. I wonder whether we are going to see that again next time we have a financial crisis. Or have the financial markets learned and will they acknowledge the fundamental progress that has been accomplished? That is a big question and I do not know the answer.

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