Emerging markets debt has done very well over the past couple of years, Robins noted at a media event last week. Emerging market bond mutual funds authorised for sale to investors in Hong Kong returned 20.5%, on average, during the two years ending on 1 January 2018, according to FE data.
This was in part an effect of fundamental improvements in the quality of economic policy making, according to Robins. “We have seen significant improvements,” he said. “Many larger markets are on par with what you see in developed markets.”
Robins said that while emerging market bonds still offer a yield pick-up, as interest rates rise in developed markets, this extra yield will gradually become less attractive. Moreover, as sovereign emerging market bonds improve in quality, they become more sensitive to US interest rates and less sensitive to spreads.
This is particularly relevant to Asian bond markets, Robins said. The T Rowe Price emerging market bond strategies Robins’s team manages are underweight Asia.
“There is less room to be rewarded for doing credit work,” he said. “For credit investors who look for significant mispricings, in situations when credit spreads can move significantly, and who don’t want to be in markets primarily driven by US bond duration, Asia offers less fertile ground.”
In particular, T Rowe Price has reduced its weighting in Indonesian bonds, in which it had a significant position in 2016, but is now underweight. One reason is that the economic reforms of president Jokowi have lost some momentum as a general election in April 2019 approaches, Robins said. The second is that the country’s debt has become expensive. “It has become a more widely held position, so the valuations are less attractive,” Robins said.
“China is our biggest underweight in the hard currency sovereign debt,” Robbins said. The primary reason is the high valuation, but the size of debt, the ratio of debt to GDP has also been a concern. “Our view on the policy side is more positive now,” he said. “The expectation is that China will be able to reduce or at least level off leverage without slowing growth.”
While Asian emerging market bonds are still, on average, not very expensive, “there is less room for spread compression and less volatility − things that we typically look for,” he said. “We look for places where you can get paid for getting a credit call right, which is not possible if a market is very stable and trades at a tight spread.”
Overweight in Latin America
This approach has steered Robins’s team towards an overweight in such countries as Brazil, Argentina, Venezuela and Mexico, as well as South Africa, Ghana, Serbia, Ukraine and Sri Lanka.
While elections in Brazil and Mexico this year may have significant effects on these countries’ markets, Robins said that their fundamentals remain positive.
“Brazil is coming out of a significant recession, so companies are able to grow earnings,” he said. “Interest rates are falling so the interest costs are coming down.” And although, like in Indonesia, structural reforms, in particular that of the pension system, have stalled in the run-up to the elections, “the domestic economic growth has picked up significantly, consumers have room to spend and corporates look attractive,” he noted. T Rowe Price’s overweight in Brazil is focused on corporate bonds, while it is underweight in sovereigns.
Similar opportunities exist in Mexico, where the upcoming elections are likely to bring into power the leftist candidate Andrés Manuel López Obrador, known as AMLO. Although Robins expects the pro-market reforms to lose momentum, he said that corporate yields remain attractive, and domestically-focused companies, insulated from the effect of a potential adjustment to the North-American Free Trade Agreement (Nafta), are very attractive.
The chart shows the three-year performance of one of the funds managed by Robins’s team, the T Rowe Price Emerging Market Bond Fund, versus its benchmark and the category average. The fund manager is Michael J. Conelius.
