“Emerging market (EM) debt entered the year with sound fundamentals, and EM foreign exchange is materially cheaper than it was a few months ago,” Michael Biggs, macro strategist and investment manager at Gam Investments told a webinar last week.
He stressed the disinflationary effects of the sharp decline in economic activity in the wake of the coronavirus pandemic, the plunge in the oil price, falling food prices, and an expected increase in unemployment.
“These disinflationary pressures combined with quantitative easing and aggressive interest rate cuts make this a very attractive environment for EM local currency bonds,” said Biggs.
The $4.85bn GAM Mulitibond – Local Emerging Bond Fund has been managed by London-based Paul MacNamara for the past two decades, and it was made available to Singapore investors in July 2019.
The fund has suffered -2.97% three-cumulative return with annualised volatility of 11.04%, compared with -1.05% for its benchmark JP Morgan GBI-EM Global Diversified Composite Unhedged index (with 10.59% volatility) and -4.96% by its emerging market fixed interest peers (with 9.18% volatility).
Its three-year performance up to 1 January 2020 was healthier, however. The fund generated a 19.34% cumulative return, outstripping its category average (15.08%), but still lagging its benchmark (22.61%). Over 10 years, it landed in the top decile of its category to October 2019, and last year AUM peaked at $9.4bn, according to Morningstar.
The most recent fund factsheeet (31 March 2020) shows 11.9% exposure to Mexican peso, 9.3% to Malaysian ringgit, 9.3% to Thai baht, 8.2% to Polish zloty, 8.0% to Indonesian rupiah, and 7.7% Russina ruble – and also about 15% in safe US Treasury bills.
Biggs identifies three key themes that should influence allocations in a local currency emerging market bond portfolio
First, he likes [longer] duration in countries with steep yield curves and sustainable fiscal outlooks, while avoiding both FX and duration in countries where fiscal solvency is threatened.
“Countries that are unable to provide a fiscal stimulus to support economic activity could suffer the sharpest downturns,” he said.
Second, Biggs is cautious about countries with deteriorating balance of payments because of the fall in oil and commodity export revenues (such as Colombia and Romania), or a decline in tourism revenue (such as Turkey and Thailand).
“These current account deficits could be harder to finance because in times of macroeconomic uncertainty, capital inflows into EM tend to fall,” he said.
Finally, Biggs favours economies that have suffered least from the coronavirus outbreak.
“Overall, Asia has seen fewer Covid-19 related fatalities than Latin America and Central and Eastern Europe. New cases are still rising, but the fatality rate is moving sideways,” he said.
Biggs’s colleague, Amy Kam, head of Asian credit and investment manager, made a more specific case for Asia fixed income.
Asia bonds have low correlation to energy and commodity prices, according Kam, who particularly likes the technology and e-commerce sectors, insurance and (counter-cyclical) China property.
“It is a large, growing, liquid, asset class with improving long term credit quality and relatively low default rates,” she said — although a report by Moody’s Investors Service warned that the Asia-Pacific high-yield non-financial company default rate will likely rise to 6.4% this year, compared with 1.1% in 2019.
GAM Multibond – Local Emerging Bond Fund vs JPM GBI EM Global Diversified Composite index and EM fixed interest sector average