The prospect of inflation in the emerging markets could cause a wealth of opportunities for FX investors, according to Amundi's, Sergei Strigo.
'General inflation is fairly negative for local bonds,' said Strigo. 'However it should be more beneficial for the foreign exchange market. It very much depends on the central banks and whether investors comes to perceive them as behind the curve or not.'
The London-based manager has reduced his exposure to local currency emerging market bonds but believes there will be opportunities in FX in the months to come.
Despite the promising outlook for the emerging debt market, Strigo believes inflation will play in an important role in the outlook for the sector over the next few months.
‘The valuations are definitely not as attractive as 2009 and 2010 - they are not cheap,’ said Strigo, manager of the Amundi Global Emergents fund. ‘If inflation is rising then allowing your local currency to appreciate is one of the tools to combat it. But there is still a lot of money that remains to be allocated into emerging market debt. The balance sheets are very strong and the countries are able to repay their debt.’
One of the few other changes he has made to his investment strategy is reduce his exposure to some Middle Eastern countries in the Gulf to the risks of civil unrest in some of these regions. However, despite the recent riots in Egypt he is still confident on the outlook for the Egyptian debt market overall.
‘It is difficult to see Egypt default in any scenario, even if Mubarak stays or if someone else takes over. Debt is very low and they have the reserves to pay it off and at the end of the day Egypt has been one of the key allies of the US and Europe in Africa.’
One of the frontier markets the manager is positive on and is currently holds is Kazakhstan as the country has no government debt. His investments focus on the corporate bonds of mainly the gas, mining and banking sectors.