FUND VIEW-HSBC says local-FX emerging bonds to outperform

LONDON (Reuters) - Emerging markets currencies will still outperform the dollar in the long run and investors should also look at local currency debt rather than keep their focus on hard currency debt, said a top fund manger at HSBC.

"We believe that anybody who is looking at emerging markets has to look at local currency, that's the end game," said Peter Marber, head of global emerging markets debt at HSBC Global Asset Management, which managed $395 billion (223 billion pounds) worth of assets at the end of June.

Local-currency debt markets have deepened in recent years as record currency surpluses built up by some emerging economies spurred them to look internally for funding rather than abroad for mainly dollar financing, Marber said.

After the 1997 Asian financial crisis, sovereign borrowers in emerging markets had become more wary of avoiding the "original sin" of raising overseas dollar debt for local-currency obligations, said the New York-based fund manager.

"It's a tough environment if you're (investing only) in the hard currency space," Marber said.

Marber helps to look after the Emerging Markets Debt - Core fund, which returned 1.02 percent in July due to investments in local currency and outperformed the external debt index.

Structural imbalances in developed markets and strong fundamentals in emerging markets are set to drive local currency appreciation in the long run despite the recent dollar rebound, he said.

Marber also said that the recent selective default by Republic of Seychelles, which failed to service a privately placed note, was not symptomatic of a wider emerging market debt default trend.

"There aren't that many sovereigns that are vulnerable to the credit crunch. Seychelles, Iceland, these are not even giving smoke signals, they're too small," he said.