Standard & Poor's has warned that India has a 1-in-3 chance of seeing its investment grade sovereign rating lowered to junk over the next two years. The odds that any downgrade would have a substantial impact on emerging-markets-debt funds are much slimmer, however.
India, despite its status as a key driver of emerging-markets equities, is largely a no-show when it comes to emerging-markets debt. In fact, it has zero weighing in the JP Morgan Emerging Markets Bond Index, the most popular benchmark for emerging-markets-debt funds.
That's because the benchmark index, and the majority of emerging-markets-bond-fund assets, are in dollar-denominated bonds. India is not a large issuer of dollar-denominated debt, said Luz Padilla, portfolio manager of the DoubleLine Emerging Markets Fixed-Income Fund Ticker:(DBLEX).
Of course, there is the possibility sentiment towards emerging-markets bonds could change because of the downgrade, she said. But in reality, the economies of the BRIC countries are well isolated from each other, both geographically and commercially. It's not comparable to the eurozone, where countries such as Greece, Spain and Germany are all intrinsically tied to each other.
“The only thing the BRIC countries really have in common is the acronym,” Ms. Padilla said. And, she points out that the acronym was coined for emerging-markets equities.
The downgrade threat comes as investor interest in emerging-markets debt is at an all-time high. The low-yields in the U.S. have helped push a record $6 billion of new money into emerging-markets-bond funds during the first quarter, according to Morningstar Inc. Assets in such funds totaled $58 billion as of the end of April, up from $36 billion at the end of the first quarter of 2011.