Emerging economies bond bubble

Emerging economies: Brazil, Russia, India, China (BRICs). Remember you start throwing whole countries into shorten economic acronyms, such as the PIIGS (Portugal, Ireland, Italy, Greece and Spain) - it then appears to be a recipe for disaster.

Rather than the PIIGS being indebted basket cases, the BRIC's are inflation driven bubbles, that are already suffering from in flow of 'hot money', which has created bubbles, particularly in their currencies.

With the BRIC's all pushing huge amounts of bonds onto the markets, please refer to Asian CDS markets are now oversupplied , the fear is that we get a sudden panic and a bubble bursts, say China's property markets and the emerging economies (BRICs) bond market (bubble) will collapse or burst.

From The Telegraph 20/12/2010

"Financial advisers fear a crash could come soon as income-seeking investors flood into emerging market bond funds, despite warnings from the Bank of England that this may be a bubble about burst. Unit trusts investing in Brazil, Russia, India and China, sometimes called the BRIC countries, and other high growth economies are attracting record inflows, according to the Investment Management Association.

Emerging market bond funds – investing in IOUs issued by BRIC governments and large companies – offer higher yields than equity or share-based emerging market funds. While Bank of England base rate remain frozen at 0.5 per cent and the yield on the FTSE 100 index of Britain’s biggest companies shares hovers around 3 per cent, some emerging market bond funds yield 6 per cent.

Only four unit trusts have a five year track record in this sector – those run by Threadneedle, M&G, Schroder and Invesco – but they have all delivered total returns of more than 50 per cent over the period, compared to less than 23 per cent from the FTSE 100. But the past is not a guide to the future and these funds do not guarantee investors’ income or capital.

The Bank of England highlighted five keys risks facing the British economy in its latest bi-annual Financial Stability Report. It said these included investors seeking better returns than they can get on deposit by investing in emerging markets. The Bank explained that too much capital flowing into these economies could lead to unsustainable bubbles which could destroy investors’ capital if they burst.

Leading independent financial advisers (IFAs) agree. Mark Dampier of Hargreaves Lansdown said: “The best time to buy emerging market bonds was during the Russian default crisis in 1998 – but did anyone do so? Of course not.

“Fast forward to now and the whole world wants them. The party is in full swing and could be fun for a little longer. Yes, we all know we have the debt and they have the cash; lending money to people who can pay it back is an excellent principle.

“But inflation is rising in most emerging markets and interest rates are going to rise further. This is surely not the best background for fixed interest bonds. In addition the flood of money is causing some governments to bring in currency controls and taxes. So my view is that investors should be very careful, as this party could end with a big hangover.”