JPMorgan’s Stealey revisits ‘unloved’ EM debt

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JPMorgan’s Stealey revisits ‘unloved’ EM debt

Strategic bond manager Iain Stealey has been targeting emerging market debt, claiming the sector is a “different universe” to when he dumped exposure almost two years ago.

The £466m JPMorgan Strategic Bond co-manager said he had been focusing on debt from Indonesia, Turkey, Mexico and Hungary as part of his recent foray into the asset class.

The manager used to have exposure to emerging market debt “and at times a decent amount”, but sold out ahead of the wild volatility in markets in May 2013.

These issues were ignited by the then Federal Reserve chairman Ben Bernanke’s mooted plans to remove his support for the US economy, which caused ructions across global markets.

Mr Stealey now has 3.5 per cent in emerging market debt, a move funded by putting pent-up cash to work.

He had no exposure at the end of August 2014, but has now started targeting the asset class in a meaningful way.

“Emerging markets [are] a different universe than a few years ago,” he said.

“We are looking at areas that were unloved about 12 to 18 months ago.”

These areas include Indonesia and Mexico.

Mr Stealey said he was bullish on Indonesia, noting that it was a beneficiary of the low price of oil.

Countries that are net importers of the commodity, such as Indonesia, will be getting a tailwind at present as the cost of buying oil is cheaper.

He also said he was keen on Mexico because “it is benefiting from what is happening in the US”, in terms of the latter’s robust economic growth and shale gas revolution.

Mexican government bonds were investment grade and very liquid, the manager added.

The Latin American country has strong ties to the US due to its geography, while its local and dollar-denominated bonds have started to rise in value in the past couple months as US yields stabilise and investors hunt for a bargain.

The 10-year Mexican government bond yielded just more than 3.4 per cent last week, while the equivalent US security was slightly less than 2 per cent, according to data from Bloomberg.

Elsewhere, the manager has also been favouring bonds in the European periphery, such as Spain and Italy, after European Central Bank president Mario Draghi’s moves last month to unleash a major package of measures aimed at stimulating Europe’s flagging economy.

Mr Draghi announced he would start monthly sovereign-bond purchases of ¤60bn (£44.4bn) from March 2015 until towards the end of 2016.

“It is not quite the same as in the US – which had infinite quantitative easing – but not far from it,” Mr Stealey said.

“[Mr Draghi] over-delivered on what the market expected.”

Both Spanish and Italian government bonds were in Mr Stealey’s top-10 holdings at the end of December 2014.

The manager has a 2024 Spanish government bond, which yields 2.75 per cent per year and makes up 1.8 per cent of his portfolio, according to the December factsheet.

He also has a 2024 Italian government bond yielding 3.75 per cent, which forms 1.2 per cent of the fund.

Could it be time to reconsider emerging market fixed income?

The emerging market fixed income sector was hit hard in the spring of 2013 following fears that monetary support for the economy would be turned off, something that saw investors rush to exit perceived risky assets.

The average fund in the IA Global Emerging Markets Bond sector fell more than 15 per cent between May 2013 and February 2014 and is still on the path to full recovery.

So will the decision by JPMorgan Asset Management’s Iain Stealey to buy back in be a good one?

When the US finally stopped pumping money into its economy at the end of October – which coincided with the dollar appreciating against most major currencies – the spectre of that decline was once again raised.

But there has not been a sell-off to the same extent as before.

Indeed, Colm McDonagh, head of emerging market fixed income at Insight Investment, told Investment Adviser at the end of last year that the current weakness should not lead investors to question the fundamental case for the asset class.

The First State emerging market debt team also pointed out investors needed to make sure they understood how local-denominated bonds and those denominated in dollars – hard currency – would react in the present macroeconomic environment and position accordingly.