BNPP IP sees record sov wealth fund interest in emerging debt

LONDON (Reuters) - Sovereign wealth funds of emerging economies are showing an unprecedented level of interest in emerging market bonds as part of a deepening institutional commitment to the asset class, says BNP Paribas Investment Partners.

BNP Paribas Investment Partners Chief Investment Officer for Emerging Markets Fixed Income Sergio Trigo Paz speaks during the Reuters Investment Outlook Summit in London December 7, 2011. REUTERS/Benjamin Beavan

“What we are seeing is a record amount of RFPs (requests for proposals) for emerging debt (mandates) from sovereign wealth funds. These are sovereign wealth funds from top-notch emerging markets. We are not seeing developed world sovereign wealth funds,” Sergio Trigo Paz, chief investment officer for global emerging fixed income at BNP Paribas Investment Partners, told the Reuters 2012 Investment Outlook Summit on Wednesday.

“We are expecting more participation from sovereign wealth funds, pension funds and central banks. They are in the process of increasing allocations to the asset class, which are now just under 10 percent of assets held by institutional investors.”

Sovereign wealth funds are seeking to hold more local-currency emerging bonds as a strategic allocation while central banks want to raise their exposure to higher-rated emerging economies such as Singapore, Chile, Brazil, Peru and South Africa, Trigo Paz said.

“We are getting subscriptions from sovereign wealth funds from December. If it is happening for us, it will be happening for everybody,” he said, speaking at the summit in London.

Trigo Paz said the dominant theme for emerging markets next year would be re-pricing as corporate and sovereign borrowers will probably find themselves paying more as bank lending tightens, causing liquidity to dwindle in some pockets of the financial markets.


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Economic fundamentals, however, remain resilient in emerging economies, which enjoy rising visibility among investors amid heightened uncertainty over policy in the developed world.

“Now ... you don’t know what’s going to happen in Europe in the next week,” he said.

BNP Paribas Investment expects double-digit returns from emerging sovereign hard-currency debt in 2012 of 10-15 percent while further monetary easing in the developing world could keep local debt returns at 8-11 percent in dollar terms.

Trigo Paz expects 5-6 percent returns from emerging corporate debt next year.

“On external debt, we favor Argentina and Venezuela as well as Middle Eastern names. Latin America is very expensive but offers relative value,” he added.

Trigo Paz said he was bullish on local debt issued by Colombia, Mexico and Peru even though he sees further rate cuts in Latin America.

“We like Argentine floating-rate bonds,” he said.

Indonesia and Brazil remained top local debt picks though caution was needed as these are crowded trades with significant foreign investor presence.

“In Asia, we are underweight everything ... but we like the Philippines. We are market-weight in South Africa but we like Poland,” he said, adding that Turkish local debt was beginning to look attractive.

BNP Paribas Investment Partners has 510 billion euros in assets under management as at end-September.

For summit blog:; Additional reporting by Carolyn Cohn and Sujata Rao; Graphics by Scott Barber; Editing by Susan Fenton