It’s no secret that emerging market bonds are booming. As worries grow over the west’s growing debt pile, investors are piling into EM bonds. Judging by credit default swaps, investors think Chile is less risky then France and Malaysia safer than Austria.
But the FT’s James Mackintosh warns that investors need to remember their history.
It is true that emerging markets are safer than in the past, thanks to political stability, strong fiscal positions and vastly improved monetary policy. Standard & Poor’s has upgraded 11 in the past year, with only two downgrades.
Even so, prices have run ahead of fundamentals. These are mostly not mature, stable democracies. Shareholders seem happy to trade higher growth for more political risk. But bondholders do not share in the upside, and are paying too little attention to the dangers.
Be wary that the past, though it may seem far behind us, can return with a vengeance, Mackintosh says.
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