Re-appraising emerging market bonds.
The US Fed is striking a dovish tone, which should provide additional support to emerging market sovereign bonds, which would, in some cases, be supported by a softer dollar.
Against the backdrop of “secular stagnation,” the yields available from emerging market debt (EMD) are attracting increasing attention …
Source: Bloomberg as at 28/01/2020.
Beyond cyclicality, EMD offers a compelling risk/return profile, but the key is to understand the different roles hard- and local currency debt can play.
Hard currency EMD compares favourably with other risk assets in terms of both historical investment returns and volatility (the extent to which investments can fall or rise).
Return vs. volatility analysis
Source: Bloomberg as at 29/07/2019.
Past performance is not a guide to future performance. The value of investments can go down as well as up and is not guaranteed.
Foreign exchange exposure through local currency EMD offers increased volatility, and potentially attractive returns in rising markets…
Source: Bloomberg as at 31/12/2019.
…but the key is to allocate to it in a tactical way, recognising the impact of both local political and global macro factors (such as the fortunes of the US dollar and commodity prices) on emerging market currencies.
Emerging market debt makes up a diverse investment “universe.” We believe that the asset class demands a rigorous, fundamental approach to portfolio construction and stock selection, and that quantitative techniques can play an important role in validating an investment thesis, helping to ensure that human error does not result in unintended exposures and risks being taken in the portfolio.
The team conducts regular and frequent research trips on the ground to understand policy markers’ reaction function and policy credibility:
Source: MGI 01/01/2019 – 31/12/2019.
In this asset class, we believe large funds managed by sizable, widely dispersed teams may be at a disadvantage, given slower decision-making, communication and implementation. Our team can react and adjust quickly to market developments, bound neither by rigid investment committees or analysts competing to get their ideas into the portfolio, nor by the size of the fund, which can unwind positions even in a difficult less liquid environment.
This case study shows how the investment team applied its process over time to an individual issue (here, a Brazilian local-currency bond). In this case, the opportunity was identified during a research trip ahead of the 2018 Brazilian presidential election. Evolving market sentiment enabled the team to adjust positioning over a roughly nine-month period, adding incremental value through a combination of active management of duration (the sensitivity of bonds to changes in interest rates) and security selection.
Source: Bloomberg as at 03/07/2019.
Portfiolio manager - emerging market debt
Senior sovereign analyst