Enzo Puntillo, head and CIO of fixed income at Swiss & Global Asset Management sees opportunities in regions such as Indonesia, Brazil, Mexico and central Europe following positive data surprises.
Indonesia, for example, recently reported a trade surplus, while the others have been surprising on the upside for some time.“The currencies of economically fragile states are currently attractively valued from a relative standpoint, and emerging market hard currency bonds are now much cheaper than high yield,”said Puntillo.
“Global bond markets normalised further during the first quarter of the year, and the impact of the financial crisis appears to have now abated.”The discount on equities has shrunk in recent years and expectations of higher interest rates have risen considerably, Puntillo noted. As a result the US market, particularly at the long end, has regained its appeal and is close to the growth expected by the Federal Reserve.
Puntillo continued: “Emerging market bonds have been slower to recover faced with the prospect
of impending tapering of quantitative easing from the US. Since 2009, emerging market bonds have seen retail outflows of around 80 to 85%. Following improved underlying data and favourable valuations, the segment is once again increasing in its appeal.”
“Following the financial crisis, the hard currency bonds segment was noticeably more expensive than high yield bonds, where investors could expect spreads that were 700 or 800 basis points higher – this trend has now reversed,” he concluded.
Luca Paolini, chief strategist at Pictet Asset Management agrees. “Local currency bond yields have climbed in recent months – quite steeply in some cases – hence, the asset class has acquired some extremely positive characteristics. Such yields are now among the highest of all global fixed income classes, yet their duration is among the lowest. Only global high-yield bonds offer a lower duration. In a period likely to see higher US bond yields, that makes for an attractive combination, in our view.”
From a technical standpoint, the trends are also positive, said Paolini. “Investment outflows from local emerging debt markets have eased in recent months while anecdotal evidence shows institutional investors are beginning to add to their positions in the asset class. Our preferred markets are Brazil, where valuations are attractive, and China, which we believe will benefit from what we see as an imminent easing in monetary policy.”
