Osses, head of emerging markets debt at HSBC and manager of the HSBC GIF GEM Debt Total Return fund, can trace his interest in the asset class back to his roots in Argentina. When he graduated from college he started working at a bank and became a credit analyst, and as part of his training he spent some time on the trading desk.
“After a couple of years in Argentina I moved to New York and got a job as a trader with Deutsche Bank working on emerging market currencies, then moved to Barclays, where I spent six years on currencies in Latin America and Asia.”
In 2006, when asset managers in the US started to invest in emerging market local debt, there were not really any experienced people on the local side of the asset class. A number of traders were interviewed and as a result Osses moved into fund management.
Correction on the cards
At HSBC he runs a total of $9.3 billion and manages the $1.1 billion HSBC GIF GEM Debt Total Return fund, the $2.3 billion HSBC GIF Emerging Markets Bond fund and the $903m HSBC GIF Emerging Markets Local Debt fund.
Osses has been reducing the risk on his portfolios as he believes we are at the start of a correction in emerging market debt following very strong performance in the early part of the year. He has positioned for this by reducing riskier exposures and increasing the emphasis on high quality issues, so replacing B rated sovereigns such as Argentina and Venezuela with BBB rated or higher corporates.
“We felt we were substantially de-risking the portfolio in exchange for some loss of liquidity,” he adds.
Currency exposure has also been reduced. He started the year with a large exposure to currency, but in late February cut all the local currency positions again with the intention of reducing risk. There are a number of risk factors which Osses believes people are not currently paying enough attention to.
“The most important issue is that in January next year the US will undergo a substantial tightening in fiscal policy. A lot of the cans the US has kicked down the road in the last two years will combine and converge in January. Payroll tax cuts will expire, as well as reductions in expenditure related to healthcare. We think the drag to GDP will be north of 3% if nothing is done.”
In the run up to the election, little is likely to be done to rock the boat and upset the electorate. When the market starts to price in these risks, we could see some correction in prices, in Osses’ view. “The market is not pricing in the potential downside from that situation.”
Middle East knock on effect
Another likely stress on global emerging market debt portfolios is the situation in the Middle East, where Israel and Iran remain at loggerheads.
“A number of countries are replacing oil imports from Iran with those from other places. Any sort of friction could see a lot of volatility in oil prices. I think that is not being fully priced in. If you look at the performance of different emerging market neutral funds, there’s a fairly meaningful increase in the amount of risk they are carrying.”
The banking system has a smaller amount of balance sheet it could put to work, and Osses says that in any correction he could step in and buy cheap assets. Even if there were no correction, he still believes he can provide some decent returns.
At a corporate debt level, Osses has a preference for Latin American companies ahead of their Asian counterparts.
“Latin American companies, just like Latin American sovereigns, were among the first in the emerging market world to issue in debt markets. They learned to deal with foreign institutional investors. It’s easier to predict how they will behave, and as a consequence the premium you will require to own their debt is lower. Asian companies have more of an equity culture. That’s something that has to be paid for in the market.”
Frontier promise
There is always the potential for frontier markets to move into the emerging market universe, and Osses notes there has been a lot of focus on African markets such as Gabon, Namibia and Ghana. Namibia has issued debt in the last few months for the first time.
“They are countries that have a fairly large amount of natural resources that can be exploited. They will become opportunities.”
There are also countries in the Middle East and Latin America where improvements in the political
situation could provide significant improvements and compression spreads. Osses highlights Argentina and Venezuela, where only small changes to the policy mix could lead to outperformance by those bond markets. In Asia, countries like Vietnam could become an attractive opportunity following changes put in place that should help the inflationary situation.
Putting it in perspective
One thing Osses is keen to emphasise is that it is important not to lose sight of the big picture. The emerging market debt landscape has changed a great deal over the last decade or so.
“As an asset class, many of the countries have gone from being the biggest debtors to the rest of the world to the biggest traders. Balance sheets have experienced a big improvement. That’s what we need to keep in mind when we look at volatility.”
He also notes that emerging market currencies have a lot more structural support, and many have benefited from the productivity gains and decrease in inflation that followed the macro stability generated by the tighter fiscal and monetary policies put in place when these countries moved from heavily managed currency regimes in the 1990s to more freely floating ones in the 2000s. Any cheapening of these emerging market currencies would make them very attractive in the long run, in Osses’ view.
