Fixed Income  

MFS’s Ryan sets aside ‘defensive’ cash reserve

MFS’s Ryan sets aside ‘defensive’ cash reserve

Emerging market bonds could be set for further pain, according to MFS’s Matthew Ryan, as markets begin to fully appreciate the plethora of headwinds buffeting this area.

Mr Ryan, who co-manages the MFS Meridian Emerging Markets Debt fund with Ward Brown, said he had built up a higher-than-normal reserve of cash as part of a defensive move.

In spite of an 8.8 per cent fall in the value of the emerging market bond index in sterling terms in the past two months, he said he was holding off buying back into the market because he felt investors had yet to fully appreciate the dangers facing the asset class.

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The manager said he had drawn up a list of buying opportunities but was being patient before putting the cash to work in anticipation of a better entry point following further falls in the market.

He said major headwinds facing emerging market debt included uncertainty around Greece, the collapse in Chinese stockmarkets, the plummeting price of many commodities and the resurgent strength of the US dollar.

The Chinese equity market has fallen by more than 30 per cent from its peak a month ago, triggering concerns among investors about a slowdown in the world’s second-largest economy.

The fears have been particularly pronounced in commodity markets, which have become more correlated with China’s fortunes as it is the biggest importer of many resources.

The price of iron ore has fallen from more than $60 (£39.10) a tonne to less than $45 a tonne since the start of July, while the price of a barrel of Brent crude oil fell 8 per cent last Monday, and at the time of writing traded at just above $56 per barrel.

The manager pointed out the commodity price falls in recent weeks constituted a major risk for his asset class because 28 per cent of the index was made up of countries that relied on exporting oil – and the proportion was much higher when all commodities were included.

“We are defensively positioned [and] very cognisant of these risks,” said Mr Ryan.

According to the fund’s latest factsheet, the managers are holding nearly 10 per cent of the portfolio’s assets in cash.

Mr Ryan said the fall in emerging market debt assets was in the “early days” and the market had so far been “relatively stable” in the face of significant adverse factors, which he expected to change.

“We are keeping our powder dry and being patient,” he said. “We have identified a few areas to increase and anticipate where to do so.

“There have been some opportunities in recent days but we are not getting too excited yet because the market has not moved much and the risks may still have further to play out.”