Ashmore hails 'value' opportunity

Bucking the gloomy trend, Jerome Booth, head of research at the Ashmore Group, says he feels like a "kid in a candy shop" in the current conditions.

As all debt except triple A rated Treasury paper was sold off last quarter, yields climbed to as high as 30 per cent at the more speculative end. This has created a wealth of "value" opportunities for asset managers that can hold on to their money through short-term losses. Ashmore Group, an emerging market specialist with $37.5bn (£27bn) of assets under management, is fortunate enough to cater mainly to "sticky" pension fund clients.

"We're really keen on buying from distressed sellers. It's a very illiquid market and there are some bargains out there," he says, pointing to dollar-denominated emerging market debt in particular. He compares the current sell-off to the market stresses of 1994-95 and 1998 in scale, but argues sovereign debt is no longer subject to the same default risk because countries such as Brazil and Russia are in better financial health than some of their developed world peers.

"An economy becomes 'developed' when the finance minister knows he can be fiscally irresponsible and the bond market won't flinch," he says. Invoking the spectre of Italy's exit from the eurozone, Mr Booth sees 10-year sovereign bonds from Italy as riskier than their Brazilian equivalents.

For similar reasons, he believes the hegemony of the dollar is now under serious threat. "Whichever way you look at it, the dollar is going to come down at some point," he says.

"It's too early to know the impact of Obama's fiscal package or even know what it is in detail. Very importantly, we also need to see what the behaviour of central bank reserve managers is going to be over the next three months," he explains.

A prospective decline in the dollar significantly weakens the medium-term case for investing in dollar-denominated debt, however cheap it looks. Mr Booth's solution is to buy local currency debt as well, which he calls "the big insurance contract you can take out against a major problem with the dollar".

Emerging market debt denominated in dollars on the one hand and local currency on the other accounted for 75 per cent of Ashmore's $37bn in June 2008. The rest consists of "special situations" - illiquid but high-return investments akin to private equity - corporate debt and equities, all in emerging markets. The company is currently bullish on all of these bar equities.

"All stock markets are going to be in for a rough ride this year, and inevitably emerging markets are going to have some of the dynamics associated with the S&P 500. Credit has also always recovered before equities historically. On a risk/return basis fixed income looks much more attractive," he says.

But Ashmore expects to wait another one to three years before the retail market wakes up to emerging market debt - traditionally the arcane reserve of institutional investors. "Once you get a bit of sanity returning, the opportunity for retail in the medium term is strong," says Graeme Dell, the group's finance director.

Stephen Wilmot is a features writer at Investment Adviser