From Kenya to Brazil to Egypt – opportunities in emerging market bonds

Sam Slator 24/03/2017 in Equities, Asia/Emerging Markets

The rhetoric surrounding possible trade wars with Mexico and/or China, alongside a rising US dollar and US government bond yields following the election of Donald Trump has, quite understandably, raised a few questions over the outlook for emerging market bonds.

But emerging markets are plentiful, with each country possessing unique macroeconomic drivers. From Kenya to Honduras, Jamaica to Egypt, the diversity makes it a great stomping ground for an active fund manager. We asked Richard House, manager of Elite Rated Standard Life Investments Emerging Market Debt fund, where he is currently investing.

“The emerging market debt universe is much more resilient today than it was back during the ‘Taper Tantrum’ of 2013,” he says. “Since then, many major emerging market countries have undergone sustained external account rebalancing, aided by a period of uninterrupted exchange rate weakness that ended at the beginning of 2016. Because of this, external financing needs have dropped sharply, and there is a greatly decreased reliance on foreign capital markets.”

Richard bases his investment approach on fundamental, top-down analysis of each investable country. He believes this allows him to understand the macroeconomic direction of travel of each country and to identify which are improving and which are deteriorating. When there is a divergence between his analysis and what is reflected in asset prices, he looks to exploit this opportunity by taking high-conviction positions.

“Indonesia is a country we view as being on an improving trajectory,” he says. “This is thanks to better terms of trade, a pick-up in activity driven by increased infrastructure spending, favourable inflation dynamics and stable fiscal trends.

“Such a broad-based improvement in its macroeconomic drivers has allowed Indonesia’s bonds to perform strongly over the past 12 months. We also see Brazil as offering value as it comes towards the end of a difficult few years at both the political and economic level. With a new market-friendly government and a domestically-oriented economy that should be relatively sheltered from policy decisions made in Washington DC, we believe Brazil will move onto a more positive trajectory in 2017.

“At the other end of the spectrum, we believe that what we don’t hold is as important as what we do hold and we are comfortable having no exposure to an issuer regardless of its representation in a benchmark. Indeed, we have long held a negative view of Turkey. Not only does it display elevated levels of political uncertainty but, being highly dependent on external financing to service its debt, Turkey is particularly vulnerable in a rising rate environment.

Richard concludes: “Emerging market bonds continue to pay a reasonable level of income and add a lot of diversification to a portfolio. At a time when broadly improving fundamentals and still-attractive valuations are intertwined with heightened uncertainty, we believe a high conviction, macro-driven country selection approach offers the best means of delivering meaningful outperformance from a genuinely diverse asset class.”

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions.Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice.Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.