Emerging markets debt has 'good prospects' despite current volatility, Morgan Stanley managers say

By Aaron Hochman-Zimmerman

New York, Aug. 1 - Recent market volatility is no reason to abandon emerging markets, according to three managers of Morgan Stanley's new Emerging Markets Domestic Debt Fund Inc.

Managers Abigail McKenna, Eric Baurmeister and Federico Kaune took part in a conference call to quell investor's concerns about ailing emerging markets.

"We continue to see a very supportive environment with good prospects," Kaune said.

Despite concerns voiced by many about the state of emerging markets, McKenna called the volatility "unwarranted," and told listeners that markets in general have been reacting to credit concerns from other markets, such as the U.S. subprime, high yield, and leveraged loan sectors.

There are strong positives in emerging markets according to the three.

"It is a good year for EM fundamentals," Kaune said, noting that many emerging countries are keeping healthy reserves of major and even other emerging currencies, and are committed to improving their balance sheets.

Baurmeister added a strong rebuttal for those he feels believe that emerging market debt "blows up every time something goes wrong," firmly stating that notion is incorrect.

"A lot of these market yields didn't back up at all," McKenna said of bonds traded in recent weeks.

The markets have held in relatively well, especially compared to these other asset classes, Baurmeister added.

Turkey and Brazil are two bright spots for the new fund, which trades on the New York Stock Exchange under the "EDD."

"We like Turkey," Kaune said, adding that the three expect Turkey's success to continue particularly after a better than expected election outcome which will allow the government to focus more on fiscal matters.

The trio views Brazil with a similar risk appetite. They feel a responsible government and central bank have given Brazil a more stable economy that is in less need of borrowed capital.

Although, the fund has "a lower risk portfolio than [it] did in June," McKenna said, the three emphasized that the outlook for emerging markets remains good.

"Growth in the emerging world is certainly above that in the developed world," she said.

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