Nov. 5 (Bloomberg) -- Emerging market corporate bonds are a better investment heading into 2010 than emerging market sovereign debt, because yields and company default rates remain attractive, according to Ashmore Investment Management Ltd.

“We see emerging market corporates as a very positive source of reasonable returns because default rates are lower than in developed market corporates,” Barry Field, head of Asia for London-based Ashmore, said in a phone interview from Singapore. “Firstly these companies have less leverage, and secondly their businesses are often based around key parts of the economy like infrastructure and energy, which means they’re less vulnerable to downturns.”

Of the 84 companies Standard & Poor’s has on negative credit watch, 33 are in the U.S., 9 are in Eastern Europe, the Middle East or Africa, and 8 are in Asia Pacific. S&P said Oct. 26 that the U.S. “continues to lead the pack with the lion’s share of potentially deteriorating entities.”

The International Monetary Fund said Oct. 29 that Asia is rebounding and growth will probably accelerate to 5.8 percent in 2010 from 2.8 percent this year, as governments in the region pump more than $950 billion into their economies to stimulate expansion.

Pension Allocations

“Thirty-five percent of the world’s GDP is in emerging market countries and IMF projections show emerging market economies will be 50 percent of GDP in less than 10 years,” said Field. “If you ask the average pension fund in the U.S. what their emerging market allocation is, it’s probably five to 10 percent, but it’ll be 30, 40, 50 percent in 10 years.”

While yield spreads over similar-maturity U.S. Treasuries have fallen for emerging market corporate bonds, Field said that benchmarked against other investments, they still represent an attractive return. He added that “high-beta emerging market sovereigns,” such as the Philippines and Indonesia, are worthy investments too. Beta typically refers to volatility.

Spreads for Asian investment-grade corporate dollar bonds have narrowed to 2.97 percentage points from a high of 7.62 percentage points on Dec. 5, while high yield spreads have narrowed to 8.94 percentage points from a high of 25.43 percentage points on Nov. 26, JPMorgan Chase & Co. indexes show.

“We had a portfolio of emerging market corporate bonds that yielded more than 30 percent in January and that yield is down to 16 percent now,” he said. “But on the other hand, if I’m going to get 3 percent in a U.S. Treasury bond and double- digit returns from emerging market corporates, I’m probably going to be happy with that for the next 12 months.”

Ashmore, which had $31.1 billion in assets under management as of Sept. 30 according to its Web site, has several investments in Asia including a 91 percent stake in Petron Corp., the Philippines’ largest oil refiner, and a controlling stake in Bangkok’s Skytrain.

To contact the reporter on this story: Katrina Nicholas in Singapore at knicholas2@bloomberg.net

Last Updated: November 4, 2009 22:21 EST