The FED rekindles interest in emerging country debt

Press release - 4/26/2019

Sovereign and corporate emerging country bonds are back in favour with investors as they look for yield and diversification in today’s low interest rate environment. The future is looking favourable for the segment now that the Fed has halted tapering and turned more accommodating. Moreover, macroeconomic conditions are excellent and companies are healthy. This momentum should help emerging country debt perform well in 2019.

Sovereign emerging bonds: being selective is essential 

The market is becoming more accessible, providing fresh opportunities to investors who only hold developed country sovereign debt. “After a choppy 2018, the potential for emerging country sovereign debt to create value is still intact this year, as long as investors are highly selective and flexible”, says Jean-Jacques Durand, Head of Emerging Debt Total Return who runs Edmond de Rothschild Fund Emerging Bonds at Edmond de Rothschild Asset Management. “Strict discipline over valuations along with a contrarian, opportunist approach will pay dividends over the long term.”

Venezuela is still one of his strong conviction picks in spite of political upheavals in the country. “We reckon that long-term recovery value is much higher than current bond prices.” The country is in the midst of transition and has the largest oil reserves in the world. Oil accounts for 95% of its exports. To preserve investments destined to reboot its oil industry, the next government will have to sit down at the negotiating table. For Jean-Jacques Durand, “the opposition is well aware of the challenges ahead. Juan Guaido has recognised all the country’s outstanding debt and means to work with international creditors over restructuring plans.”  

The fund manager also thinks Turkey provides an investment opportunity, especially because of attractive valuations. The country has low debt levels and has managed to keep its deficit under control. “True, the political situation is still complicated but President Erdogan can be pragmatic when he has no choice. Unlike Russia, Turkey cannot afford to be economically isolated.” Argentina, which is also undergoing transition, is another large portfolio position, along with Ukraine.

The investment team invests primarily in hard-currency sovereign or quasi-sovereign debt because the segment offers a very wide variety of investment vehicles. The fund managers point out that hard-currency emerging country debt has not seen two consecutive years of negative returns since 1991.

The team is well aware of market risks from rather high valuations -even if they are still attractive for countries like Turkey, Argentina and Venezuela- and so has built up cash and taken out hedges to seize any fresh opportunities. 

Building on its emerging country debt expertise, Edmond de Rothschild Asset Management has launched a new fund, EdR Fund Emerging Sovereign. Its investment philosophy is similar to EdR Fund Emerging Bonds, as it avoids benchmarked investing to make strong bets. The strategy is, nevertheless, less aggressive and seeks to limit risk-taking by excluding CCC-rated bonds in the high yield segment so as to cushion any shocks. Combined with a precise risk-control process, this approach gives the fund a risk/return profile half-way between emerging debt market indices and EdR Fund Emerging Bonds.

Emerging market corporate debt: A must-have segment

Thanks to its attractive valuations, corporate emerging country debt is now a must-have segment in the rich and diversified fixed income universe. With today’s upbeat macroeconomic environment, companies have comfortable amounts of cash so default rates are low. Corporate emerging debt gives investors access to a broad variety of sectors, companies, geographical zones and credit ratings. It also means being able to invest in companies which are not listed on equity markets and which prefer to sell debt before considering an IPO. The segment’s risk/return profile is particularly attractive and total returns, bolstered by generous coupons, mostly set it apart from performance in other bond classes.

Stéphane Mayor, Head of Emerging Corporate Debt who runs Edmond de Rothschild Fund Emerging Credit at Edmond de Rothschild Asset Management, allocates a high percentage of the fund to hard-currency high yield bonds with spreads of around 500bp which are likely to produce attractive returns. Brazil is the fund’s biggest position. For the fund manager, “the country is still on an appealing growth trajectory and the essential pension reform which has been engaged should bear its first fruits this year.”

Thanks to ongoing normalisation after the agreement on debt restructuring, Ukraine is another high-conviction position. The country currently boasts one of the best risk/return profiles in the investment universe. Argentina and Turkey have seen choppy trading in recent weeks but they could also come back into favour with investors and offer interesting returns. Russia and Nigeria are also well-represented in the fund. “We are focused on commodities like oil and gas as well as metals and mines,” says Stéphane Mayor, adding that he also likes financials and consumption plays.

His investment approach is based on strong, non-benchmarked convictions. Starting with a top-down scenario (countries, commodities, political environments and sectors, etc.) as well as bottom-up analysis, he picks companies with the most attractive risk/return profiles. He only invests in companies which he knows well and has regular meetings with management teams. For him, “geographical and sector diversification is a key part of portfolio construction when looking to limit risk.”

Elément complémentaire

EdR Fund Emerging Bonds is classified in category 5 in line with the nature of securities and geographical zones in the “objectives and investment policy” section of the key investor information document (KIID). EdR Fund Emerging Sovereign is classified in category 5 in line with the nature of securities and geographical zones in the “objectives and investment policy” section of the key investor information document (KIID). Edmond de Rothschild Fund Emerging Credit is classified in category 4 in line with the nature of securities and geographical zones in the “objectives and investment policy” section of the key investor information document (KIID). Risk of capital loss, credit risk, credit risk from investing in high yield bonds, interest rate risk, risk related to investing in emerging markets, risk related to the commitment on financial and counterparty contracts.

April 2019. This document is non-binding and its content is exclusively designed for information purposes. Any reproduction, alteration, disclosure or dissemination of this material in whole or in part without prior written consent from the Edmond de Rothschild Group is strictly prohibited. The information provided in this document should not be considered as an offer, an inducement, or a solicitation to deal, by anyone in any jurisdiction where it would be unlawful or where the person providing it is not qualified to do so. It is not intended to constitute, and should not be construed as investment, legal, or tax advice, nor as a recommendation to buy, sell or continue to hold any investment. EdRAM shall incur no liability for any investment decisions based on this document. This document has not been reviewed or approved by any regulator in any jurisdiction. The regulation concerning marketing conditions of UCITS and AIFs (“Funds” hereafter) varies from country to country. The Funds presented herein may not be registered and/or authorised in your country. You should seek advice from your professional advisor if you are in doubt as to whether any of the Funds mentioned might be suitable for your individual situation. This document is not intended for citizens or residents of the United States of America or “U.S. Persons” as defined by “Regulation S” under the U.S. Securities Act of 1933. No investment product presented herein is registered under the Securities Act of 1933 or any other United States regulation. Then, they cannot be offered or sold directly or indirectly in the United States of America, to or to the benefit of residents and citizens of the United States of America and to «U.S. Persons». The figures, comments, forward looking statements and elements provided in this document reflect the opinion of EdRAM on market trends based on economic data and information available as of today. They may no longer be relevant when investors read this document. In addition, EdRAM shall assume no liability for the quality or accuracy of information / economic data provided by third parties. Any investment involves specific risks. We recommend investors to ensure the suitability and/or appropriateness of any investment to its individual situation, using appropriate independent advice, where necessary. Furthermore, investors must read the key investor information document (KIID) and/or any other legal documentation requested by local regulation, that are provided before any subscription and available at section, or upon request free of charge. Past performance and past volatility are not reliable indicators for future performance and future volatility. Performance may vary over time and be independently affected by, inter alia, changes in exchange rates. Performance data does not include commissions and costs incurred on subscriptions and redemptions of units or shares of the Funds. « Edmond de Rothschild Asset Management » or « EdRAM » refers to the Asset Management division of the Edmond de Rothschild Group. In addition, it is the commercial name of the asset management entities (including branches and subsidiaries) of the Edmond de Rothschild Group.

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