Although many bond fund managers are short duration against their benchmarks, “I’m not afraid of duration,” Arevalo, who is based in London, told FSA during a recent visit to Hong Kong. “I don’t share the view that the Fed is falling behind the curve and we may have to price in another rate hike this year.”
“The growth in the US has been consumer-led,” he said. This has caused a decline in savings and an increase in credit card debt. Higher interest rates are likely to stem this trend.
Similarly, the recently introduced US tax cuts will enlarge the budget deficit. “I don’t think we’ll see [faster interest rate hikes] than currently expected. That to me is not a risk at the moment,” he added.
EM bonds and risk
In the meantime, the steep yield curve for emerging market bonds presents opportunities to improve the liquidity of his Global Emerging Markets Corporate Bond Fund by rotating from short duration high yield bonds to investment grade bonds in the long part of the curve, he said.
The fund, benchmarked to the JPMorgan Corporate Emerging Markets Bond Broad Diversified Index, holds around 35% in Latin America Debt, 28% in Asia-Pacific ex-Japan, 15% in Emerging Europe and the rest in Africa and Middle East debt.
“We have an overweight in Latin America,” Arevalo said. “We continue to see a cyclical recovery in the region, benefiting not only from commodity prices, which is a strong global trend, but also from strong domestic demand. This is a sustainable type of growth that we want to see in emerging markets.”
The region’s politics remains a risk, however. “I am very conscious about the heavy presidential election calendar in Latin America,” Arevalo said. Presidential elections are scheduled in Colombia in May, in Mexico in July and in Brazil in October this year.
“This can bring some volatility to the markets,” Arevalo said. He said he was relieved that Brazil’s former president Luiz Inácio Lula da Silva is facing serious legal obstacles in his presidential run this year. He was more concerned by the prospects of Andrés Manuel López Obrador, known as AMLO, a leftist populist presidential candidate in Mexico, who is ahead at the polls.
Nevertheless, the fundamentals in Latin American economies remain strong, according to Arevalo. “And you’re getting paid for the risks,” he added.
The emerging market debt sector has recently seen an inflow of opportunistic assets in search of yield, which Arevalo calls “tourist money”. He said that these flows have caused mis-pricing of risk in the corporate debt universe and made thorough fundamental research even more essential.
Another risk, which is external to emerging markets, is if the US economy sees a surprise jump in inflation and wage growth. Then the market is likely to price in quicker interest rate hikes than what is expected today and volatility would ripple through the fixed income universe and particularly hit emerging market bonds.
However, he believes that scenario is unlikely to unfold.
Performance of the Jupiter Global Emerging Markets Corporate Bond Fund since inception
