Local Currency: Gaining currency

May 1, 2013

Investors continue to pile into local currency debt. But liquidity limits and strict investment criteria will keep the markets constrained

By Katie Llanos-Small

For a time last year, it seemed that one of the most compelling narratives in emerging markets investment had run its course. As eurozone fears reached their climax, a surge in risk aversion saw investors shun local currency debt – an asset class which had distinguished itself post-crisis as one of the most appealing anywhere – in favor of hard currency.

But the retreat didn’t last long. A sharp improvement in risk sentiment following central bank moves to put a floor under the crisis lent fresh momentum to the investment thesis. And the asset class is once again the mostly highly sought after in emerging markets, as portfolio managers extend their hunt for yield.

EM local currency debt funds took in $14.7 billion of new cash in the first quarter of the year, leaving EM hard currency funds trailing, with just $3.4 billion of inflows, according to research firm...

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