Axa Investment Managers’ Saliesh Lad has said emerging market debt managers can step out of the shadow of US political risk this year by focusing on countries that stand to benefit from a new administration in the White House.
The Axa EF Emerging Markets Short Duration Bonds fund manager said the indiscriminate sell-off in developing economies’ debt following November’s US election had come to an end, with more nuanced economic reasoning now in the ascendancy.
With dispersion between the movements of individual securities on the increase, Mr Lad suggested he stood to benefit through effective asset allocation. While he expected to remain close to his target allocation of 20 per cent in Asian debt, 40 per cent in Central and Eastern European securities, and 40 per cent in Latin America, the manager has begun to shift his portfolio around.
“We’re trying to take advantage of the way the market is going,” he said. “If you want to generate alpha then this is the way to do that.
“Last year there was no discrimination, and everything sold off. But there is market differentiation now, with the likes of Mexico specifically selling off. This is still not really down to default risk though, just continued volatility.”
The fund avoided the recent slump in Mexican bond prices by reducing exposure in the latter part of 2016, subsequently recycling capital into a strong primary market in more favoured regions this year. The initial sales were made as a result of fears that US president Donald Trump’s trade and import tax policies could hurt Mexican corporates.
Elsewhere, the manager is now focusing his attention on Russian and Brazilian corporates. The two countries now account for 10 per cent of the portfolio apiece, surpassing the 18 per cent allocation to Asian emerging markets.
“Asian economies are rich and expensive,” he said. “Our main concern is Trump versus China, and the concerns in the latter in terms of growth and a property bubble are still there.”
“Brazil is on the right track and in Russia, the sanctions have meant companies have deleveraged and become safer stocks with more cash. We are very comfortable taking Russian risk. I believe Donald Trump will be nicer [to Russia] than previous administrations.”
The manager is increasing exposure to other countries in the region such as Georgia and Kazakhstan for similar reasons.
However, other emerging economies have given Mr Lad cause for concern. Turkey, which has endured political turmoil, is one such case. The fund has close to 7 per cent exposure to the region, its fourth highest allocation, but the manager said he was wrestling with the implications of recent developments. “We are scratching our heads at what an executive presidency could mean in Turkey,” he admitted.
The Luxembourg-domiciled fund returned 9 per cent over three years compared with 3.4 per cent for the offshore USD Short/Medium maturity sector, according to FE Analytics.
