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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.
Past performance is not a guide to future performance and may not be repeated. Investment involves risk. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Because of this, an investor is not certain to make a profit on an investment and may lose money. Exchange rate changes may cause the value of overseas investments to rise or fall.
This communication provides information relating to Merian Emerging Market Debt Fund (the “Fund”), which is a sub-fund of Merian Global Investors Series plc. Merian Global Investors Series plc is an investment company with variable capital established as an umbrella fund with segregated liability between sub-funds which is authorised and regulated by the Central Bank of Ireland pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011, as amended. Registered in Ireland under
registration number 271517. Registered office: 33 Sir John Rogerson’s Quay, Dublin 2, Ireland.
In Hong Kong, this communication is issued by Merian Global Investors (Asia Pacific) Limited. Merian Global Investors (Asia Pacific) Limited is licensed to carry out Type 1 and Type 4 regulated activities in Hong Kong. This communication has been prepared for general information only. It does not purport to be all-inclusive or contain all of the information which a proposed investor may require in order to make a decision as to whether to invest in the fund. Nothing in this document constitutes a recommendation suitable or appropriate to a recipient’s individual circumstances or otherwise constitutes a personal recommendation. No investment decisions should be made without first reviewing the offering document (including the risk factors) and the key facts statement of the fund (if applicable) which can be obtained from www.merian.com. This communication has not been reviewed by the SFC. The investment returns are denominated in share class dealing currency, which may be a foreign currency. If so, US/HK dollar-based investors are therefore exposed to fluctuations in the US/HK dollar/foreign currency exchange rate. The Fund is authorised by the Securities and Futures Commission (“SFC”) in Hong Kong. Such authorisation is not a recommendation or
endorsement of the Fund nor does it guarantee the commercial merits of the Fund or its performance. It does not mean the Fund is suitable for all investors nor is it an
endorsement of its suitability for any particular investor or class of investors.
The Fund may be more than 35% invested in Government and public securities. These can be issued by other countries and Governments. Your attention is drawn to the stated investment policy which is set out in the Fund’s prospectus.
Portfiolio manager - emerging market debt
Senior sovereign analyst