HEAD-TO-HEAD: Fidelity versus Templeton

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Patrick Ge, Morningstar

Introduction

Diverging inflationary prospects, combined with volatile commodity prices, heightened geopolitical tensions, and challenging supply chain bottlenecks, means that 2022 could see much more market volatility than in previous years, Cosmo Zhang, research analyst at Vontobel, said at the recent FSA Investment Forum, Hong Kong.

The US Federal Reserve will likely raise interest rates, amid a roaring US job market and persistently high inflation, which justify a faster pace of quantitative tightening. The Fed aims to significantly shrink the balance sheet over time, while in the longer run hold mainly Treasury securities and shed most of the 2.7trn of mortgage-backed securities it currently owns.

As a result, investment grade bonds globally, especially long-dated ones, will see significant downward pressure. Short-dated, high-yielding bonds should be less affected, Zhang said.

While this would benefit hard currency high-yield bonds from emerging markets, higher US rates could drive the US dollar stronger and dampen the sentiment on emerging markets assets. Combined with potentially greater geopolitics tensions, this could materially change fund flows to and from emerging markets, he added.

Meanwhile, China is entering disinflation, which allows the government ample space for more aggressive easing in monetary policies and fiscal stimulus.

China’s central bank could also pump liquidity into the financial system directly through “window guidance” to support a faltering economy. Amid a continued property market slump and repeated virus outbreaks, Beijing has shifted to a more pro-growth bias since the end of 2021, he added.

“We see a lot of value from the oversold bonds in the Chinese property sector, along with rates / policy-sensitive credits (such as bank Tier 2 and bonds issued from Chinese local government financing vehicles (LGFVs)),” according to Zhang.

Once supportive policies are implemented, these bonds will outperform in 2022. Companies related to industrial production and fixed investments could also benefit from fiscal stimulus, driving their bonds to perform well. Green energy-related names from India and China are also attractive.

Investors often underestimate the advantages of investing in global emerging markets, Zhang pointed out.

However, the high volatility and cyclicality of Asian credit markets result in less attractive risk-adjusted returns versus more diversified global emerging markets portfolios, particularly across market cycles.

On a regional level, Vontobel thinks Latin America is home to attractive opportunities, including selective companies in countries such as Brazil, Colombia and Mexico.

Against this background, FSA asked Patrick Ge, analyst at Morningstar, to select two emerging market bond products for comparison: the Fidelity Emerging Market Debt Fund and Templeton Emerging Market Bond Fund.

Table: Fidelity Emerging Market Debt Fund and the Templeton Emerging Market Bond Fund

Source: FE Fundinfo, Morningstar. (Data in US dollars, 7 March 2022)

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