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… as yield search adds lustre to emerging market debt
(Pictured: Paul McNamara)
Currency movements over the past two years took the shine off emerging market bonds, but this is unlikely to continue, according to Paul McNamara, investment director of GAM International. As a provider of yield, emerging market bonds are in a better position in the world of sovereigns.
“There were some big currency losses in 2013 and it took a while to recover from that,” he said last week on a trip to Australia. “You should be able to grind out a decent return from here.”
He believes that it is unclear whether the world is tightening monetary policy. “The [US] Fed say they are going to in six-nine months but it always seems to be six-nine months away. Europe is on the loose and China is also loosening too. It’s not just Australia.”
He is also a little concerned about the consensus view of the US dollar, which is that it will continue to rise against almost every other currency on the back of a stronger US economy.
“We think China is more important for Australian investors than the US dollar. There will be a few years of slower growth there… The stronger US dollar has prompted such a consensus view that I’m a bit shy of jumping on board that. And I’m not a gratuitous contrarian.”
When the consensus turns out to be wrong it can be “disastrous”, he says. But it’s not always wrong.
The currencies GAM currently overweights are those of India, Poland and Mexico and under-weights or shorts are on South Africa, Russia and Colombia. Russia, in particular, is a disaster, McNamara says. “It’s run by thieves for thieves.”
GAM has two emerging market debt strategies: a long-only fund with about US$6 billion invested and a long/short fund, with US$500 million. Both are managed in the firm’s fundamental top-down style.
“The low-yield environment is making everyone re-think their investment strategies, so that’s created a lot of interest in the product. “Everyone’s saying ‘how do I make money?’. They’re also looking harder at credit.”
In the same way, emerging market corporate bonds look attractive but GAM doesn’t hold any because of the lack of transparency and thinness of the market.
Because of its investment style, GAM puts a lot of time into studying scenarios which could lead to crises. “The whole thing in emerging markets is crisis,” he says. “I started [at GAM] in 1997 and within six months Asia blew up. What you have to watch for is when a country starts to borrow too much domestically. If it’s the private sector it’s usually for real estate development. That’s been true through the ages. The country develops a hole in its balance of payments and the economy becomes vulnerable.” Current examples are Greece and Argentina.
GAM believes the countries in the deepest trouble are Argentina, Venezuela and Ukraine. In terms of its own portfolio the one it most worries about is Turkey, which has a lot of foreign currency debt and has a sustained period of high borrowing.
