xfdws HIGH-YIELD-BONDS sked Emerging Markets Datafile

September 18, 2003

HONG KONG IMAIL

HONG KONG

ENGLISH

High-yield bonds tipped to stay strong, HONG KONG IMAIL

Foster Wong

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Emerging markets and high-yield bonds will remain strong in the next six to 12 months while the equities market had staged a comeback, according to Barep Asset Management.

Barep, which is the alternative and structured investments arm of SG Asset Management, said it expected volatility in the global markets to remain high in the near future, so risk assets such as credit products and hedge funds would provide good opportunities along with equities.

“During this period of uncertainty, there are good opportunities but investors need to be willing to take risks,” Barep’s head of global credit markets James Edwards said.

“That said, the emerging markets and high yield bond markets have consistently generated strong returns over the past decade.”

Emerging market bonds have posted a positive 67 per cent return over the past five years and 18 per cent in the year to date.

High-yield bonds have generated returns of 24 per cent over the past five years and 10 per cent so far this year, according Barep.

This compared with a 39 per cent jump in US government bonds in the last five years but a 0.9 per cent drop in the year to date.

Hong Kong equities, on the other hand, surged 37 per cent over the past five years and posted a 19 per cent return so far this year.

“We think there is more value in credit and equities and not a lot of value in government bonds,” Edwards said.

He said high-yield credit products generally are quite leveraged, where their debt-equity ratio and the interest rate coverage ratio are less strong.

“This should benefit from an environment where the rate remains low and the economy is picking up,” Edwards said. He did not expect the short-term interest rate to change.

He said he expected the US 10-Year Treasury rate to stay in the range of between 4.5 per cent to 5 per cent over the next 6-12 months. This compared with 4.3 per cent at present.

Meanwhile, the outlook of bonds from emerging markets such as Brazil and the Philippines remains positive.

Edwards noted that the same could be said for corporate bonds in the telecom sector.

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