Emerging markets set to thrive in 2011, according to ratings

Emerging market bonds are a rare bright spot in a 2011 outlook for fixed interest markets clouded by European sovereign debt worries and a US economy that has yet to get back on its feet, it is claimed.

Fitch Ratings says credit markets in Asia and Latin America are bouncing back after the global financial crisis and the contrast with developed nations is becoming more pronounced.

‘Emerging markets are thriving overall,’ the global credit ratings agency said, adding that this applies to sovereign credit ratings and other asset classes.

Despite vast capital flows posing currency and monetary challenges for fast-growing countries in Asia and South America, the outlook for credit ratings on sovereign governments and banks is broadly positive.

Three years after the global financial crisis hit, global corporates were healthier and those with emerging market exposures would continue to see growth, Fitch said.

Although no longer recommending investors be overweight on credit exposures, Russell Investments says investors should maintain full weightings on exposures since credit spreads for the sovereign and high yield sectors are attractive.

‘Around the world, the risk is to the upside in terms of yields and to the downside in terms of capital growth potential,’ said Russell’s chief investment strategist Andrew Pease.

Fitch said the US economic recovery was fragile and facing inflation and currency risks from the second round of quantitative easing introduced last November which will enlarge budget deficits and debt.

US fiscal metrics will be the worst of any triple A-rated sovereign, but the dynamism and flexibility of the US economy, as well as the US dollar's status as the world's reserve currency, gives it a higher debt tolerance.

Fitch also weighed into the debate of the health of the US municipal bond sector following comments by US banking analyst Meredith Whitney that municipal governments face a wave of defaults.

'While the incidence of default may increase from very low historical levels, defaults will continue to be isolated situations,’ Fitch said, while acknowledging downgrades for local and state governments would outpace upgrades.

In Europe, Fitch warns fixed income investors to beware more episodes of ‘extreme market volatility’ and a risk that more European nations will need bailouts from the International Monetary Fund and European Union.

‘The eurozone with muddle through rather than break up in the wake of systemic sovereign debt defaults or become a fully fledged fiscal union,’ it said.

More negative ratings actions in Europe are on the cards in 2011, and around a quarter of Europe’s banks have negative credit rating outlooks.