Jupiter defends EM debt risks

Asset Class in Focus

Separately, the firm plans to expand its GEM fixed income team to include an Asia-focused analyst, according to Alejandro Arevalo, London-based emerging market fixed income fund manager at Jupiter Asset Management.

Arevalo, who manages two emerging markets fixed income products – a short duration corporate bond fund and a corporate bond fund – ranks emerging market bonds by using a macro and political scoring system.

“For us it is a combination of macro and political factors, and then we compare those against valuations to see if we are getting paid for the risk that we are taking,” he told FSA in a recent interview.

Investors have often snubbed emerging markets because of political risks and have compared them against the US, which Arevalo finds unfair.

“Good companies are being penalised just because of where they operate in, so you have some investors saying ‘I like US high yield more than emerging markets high yield’.”

But a number of companies in emerging markets can provide investment opportunities despite the risks.

One example is Argentina, which investors have often avoided because of high inflation rates and the upcoming presidential elections in October, according to Arevalo.

However, a number of Argentina corporate bonds provide double-digit returns in US dollars terms and are even investment grade-rated. Currently, the firm’s Global Emerging Markets Short Duration Bond and the Global Emerging Markets Corporate portfolios each have around 3.5% of their assets in Argentina.

“It is very dominated by inflation and political headlines, but when you look at corporates, they have operated for 10 years with no access to [bank loans] as they were charging ridiculous interest rates.

“They learned how to have very little leverage and were able to generate cash flows during that time. So when they came into the international bond markets in 2016-2017, they had leverage close to zero and very steady management,” he said.

Another market is China, which Arevalo continues to be cautious due to trade tensions with the US and slower economic growth.

“You also have headlines of international companies relocating their businesses out of China.”

However, Arevalo finds opportunities in real estate, which is supported by the government.

“Real estate continues to be very stable, and we are focused on the ones that will be the consolidators in the industry,” he said. At the moment, both his portfolios each have around 6% in China.

But of all the emerging markets, Arevalo has the highest caution on Turkey.

Although he is invested in short-term Turkish corporate bonds, he noted that it is the first market that he looks at whenever he checks his portfolios.

“Apart from the macro risks, you have a government that has taken control over the country’s monetary and fiscal policy. It would be the first country that I look at in my portfolio and it keeps me awake at night.”

More defensive

Separately, Arevalo said that both his strategies have trimmed down high yield allocations and have shifted into investment grade bonds. Both funds now have an average rating of BB+ from BB two months ago.

He said it is the right time to take profits from high yield, especially since valuations have become less attractive compared to 2018. “And with the global economic slowdown, I’m expecting a bumpier ride in the second half this year. So the best way to protect your portfolio is to be invested in companies that do not rely much on the international or local bond markets.”

A number of industry players, such as Citi Private Bank, Schroders and Robeco have also expressed preference for investment grade bonds, as high yield has become more expensive and are more vulnerable in an economic slowdown.

Team expansion

Jupiter’s global emerging market bond team was set up in 2016 and launched the GEM Corporate Bond Fund in March 2017 and the GEM Short Duration Bond Fund in September 2017.

The Corporate Bond Fund is only available to professional investors, while the Short Duration Bond Fund is authorised for retail sale in Hong Kong.

“If investors want to be more defensive and have a lower volatility product, they can invest in the short duration product. If they are bullish, they can go for the other fund,” Arevalo said.

Arevalo is supported by two analysts: one focusing on Latin America and another on Central Europe, Middle East and Africa.

The firm now plans to further expand the team to have a dedicated analyst covering Asia.

“I was just given another headcount for Asia. But it is very recent news, so I still do not know if he or she will be based in Singapore, Hong Kong or in London,” he said.


The firm’s two EM bond funds versus their sectors in Hong Kong and Singapore

Source: FE Analytics. In US dollars. Note: the Global Emerging Markets Corporate Bond’s (available only to professional investors) benchmark index, the JP Morgan CEMBI Broad Diversified, is not available on FE. The Emerging Markets Short Duration Bond Fund (SFC-authorised) does not have a benchmark index.

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