BNP Buying More Emerging-Market Debt on ‘Virtuous Cycle’

BNP Paribas Investment Partners is buying emerging-market debt because of a “virtuous cycle” of strong economic growth and improved national finances, while hedging against a worsening of Europe’s debt crisis.

BNP’s Fischer Francis Trees & Watts unit, which manages $56 billion of assets, holds about 25 percent of its global fund in developing-nation securities, compared with 15 percent a year ago and the weighing of almost zero in the benchmarks it uses to track performance, according to Chief Investment Officer Guy Williams, who added that there is room to add more. The company is using credit-default swaps and currency forwards to protect against losses in euro-denominated securities, he said.

“If you look at the things that worry us, they tend to be things in the developed world, sovereign-debt issues in Europe and U.S.,” Williams said in an April 25 interview in Hong Kong. “The improved fundamentals of emerging markets have been rewarded by a virtuous cycle of strong performance, portfolio inflows and credit-rating upgrades.”

Emerging debt markets have become more active, increasing BNP’s appetite for the higher returns available, he said. The yield on developing-nation sovereign debt denominated in dollars was 4.69 percent, compared with 2.96 percent on developed-market bonds, Bank of America Merrill Lynch indexes showed.

The International Monetary Fund raised its world growth forecast to 3.5 percent this year and 4.1 percent next year on April 17, up from January projections of 3.3 percent and 4 percent, as the U.S. economic outlook improves. Developing countries will grow 5.7 percent this year, while the euro zone will contract 0.3 percent, the IMF said.

Going Downhill

European government austerity plans are at odds with the need for economic stimulus, while government changes may complicate efforts to find a balanced solution, said Williams. Unemployment in the euro zone surged to 10.8 percent in February, the highest since June 1997.

France will hold the second round of presidential elections on May 6, with two polls suggesting Socialist Francois Hollande, who has vowed to stop job cuts, would beat President Nicolas Sarkozy. Greeks will vote for lawmakers on the same day. The Netherlands is set to choose a new prime minister on Sept. 12.

“There’s a clear event-risk calendar in the second quarter,” said Williams. “As long as neither fiscal union nor European Union break-up occurs, Europe will remain in a difficult muddle-through environment. Growth is the way out of this difficult period, but growth remains elusive.”

The euro will depreciate in the medium term, said Williams, either because of concerns over the crisis or central bank printing of the currency. The Hungarian forint and Russian ruble both gained more than 10 percent this year against the dollar, as the euro climbed 2 percent.

Weak Greenback

The U.S. has similar issues, which will bolster the performance of Asian currencies against the greenback, according to Williams. The American economy has “significant structural headwinds” as the government and companies curb spending, strangling consumer demand, he said. The U.S. will expand at around 2 percent or less this year, he added.

The Dollar Index, tracking the greenback against currencies of major trading partners, has fallen 1.8 percent this year, partly on expectations the central bank would flood the economy with the currency. Federal Reserve Chairman Ben S. Bernanke said on April 25 he stands ready to add to stimulus if necessary.

“The trend is the dollar will remain weak,” said Williams. “The U.S. has one advantage which Europe doesn’t, which is an ability to print money and thus to effectively gently reflate or inflate their way out of debt and growth trouble.”

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