Fixed Income  

Dissecting emerging markets is key

Dissecting emerging markets is key

The emerging markets sector is the “most interesting” area for bond investors, especially if the right opportunities are uncovered, Nick Gartside has said.

Emerging markets debt makes up the second-largest part of the manager’s $782m (£500m) JPMorgan Global Bond Opportunities fund at 15.9 per cent.

The fixed income manager admitted that while some investors might see plenty of headwinds for emerging markets – such as interest rate rises in the US and a strengthening US dollar – good investments still existed.

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He said “differentiation” was the “name of the game”, rather than lumping emerging markets into one homogenous group.

Mr Gartside said the current big differentiator was the distinction between those countries that import and export oil. This is because the large falls in the commodity’s price has made it cheaper for those purchasing it but equally less profitable for those economies that rely on the commodity as a key export.

Countries Mr Gartside favours at the moment are South Africa, Indonesia and Turkey. He is less positive on oil-exporters Russia, Venezuela and Nigeria.

His third-largest holding at 1.5 per cent of his portfolio is a 2048 bond issued by the South African government that yields 8.75 per cent.

In terms of how the manager’s emerging markets exposure is split, Mr Gartside holds a third in local currency government debt, another third in dollar-denominated government debt and the remainder in dollar-denominated corporate debt.

There have been concerns the impending rate rise in the US would bring a repeat of the 2013 ‘taper tantrum’ and some strategic bond managers have warned investors to avoid emerging markets debt.

Back in May 2013, investors dumped fixed income holdings, particularly those belonging to emerging markets, after the then Federal Reserve chairman Ben Bernanke signalled the end of US quantitative easing.

However, Mr Gartside, who predicts the first rate rise to come in September this year, thinks this time the scenario is different.

“The discussion is not if the Fed will raise rates, but when will they raise rates,” he said.

“There are already tentative signs of a recovery so it won’t be a huge issue for markets.”

The group’s Strategic Bond fund, which Mr Gartside co-manages with Bob Michele and Iain Stealey, also started upping its exposure to emerging markets debt earlier this year.

In February, Mr Stealey told Investment Adviser he had begun targeting emerging markets debt, claiming the sector was a “different universe” to when he dumped exposure two years ago.

He said he had been focusing on debt from Indonesia, Turkey, Mexico and Hungary.

The other area of the market currently taking Mr Gartside’s fancy is high yield, which makes up the largest part of his portfolio at 39.1 per cent. He thinks high-yield bonds “are a steal” and “offer a lot of value”.

“Government bonds are yielding nothing, so on a relative basis we feel we are being more than compensated,” he said.