22 de enero de 2016 / 16:17 / en 2 años

RPT -INVESTMENT FOCUS-The answer to risk? More risk

(Repeats Jan. 22 story with no changes to text)

* More illiquid markets less likely to sell off

* Managers seeking names insulated from oil price, China

* GRAPHIC-Toxic Trio bond performance:

* link.reuters.com/fac26w

By Marc Jones and Claire Milhench

LONDON, Jan 22 (Reuters) - The volatility across mainstream emerging assets is driving bond fund managers to seek safety in even riskier markets such as Pakistan, Jamaica, Argentina, Honduras and Venezuela.

These countries may have looked unappealing two or three years ago, but the fact that they have a low correlation with global asset price swings and tend to be too illiquid for people to sell out of, is making them increasingly attractive.

“The six best performing bonds in the world last year were credits that most people wouldn’t touch with a barge pole, and it will probably be the same this year,” said Jan Dehn at emerging market fund manager Ashmore.

“We are in an environment of extreme risk aversion but the bottom line is that this is how you make money.”

Among these so-called frontier markets, there are some little known reform stories - notably in serial defaulters such as Pakistan, where an IMF programme is going far more smoothly than usual, and Argentina, where hopes are building it may be finally turning a corner.

Brazil, whose bonds and real currency took a hammering last year, is one of the few countries where bonds have made money in 2016.

The backdrop is pretty dire - emerging markets broadly have suffered their worst start to a year, with yield spreads over U.S. Treasuries widening by some 70 basis points, the fastest deterioration since 2009, says Zsolt Papp at JPMorgan Asset Management.

Pressures are mounting, with $2.3 billion of outflows from EM debt funds in the last week, the highest in 20 weeks.

So fund managers are being forced to consider frontier names, like Pakistan, which returned 8 percent in dollar terms in 2015 and seems to be a top pick this year too.

“Pakistan is probably one of the best frontier market stories out there. They are doing everything the IMF is asking of them, well at least by their standards,” said Edwin Gutierrez, head of emerging market sovereign debt at Aberdeen Asset Management. “And they are one of the biggest beneficiaries of the low oil price.”

Claudia Calich, manager of the M&G Emerging Markets Bond fund, likes Pakistan too. “The economy doesn’t rely on tourism, unlike Egypt or Tunisia, so the economic impact from additional (terror) attacks is quite different,” she said.


Some investors are also putting their money into smaller names in Central America and the Caribbean, such as the Dominican Republic, Honduras and even recent defaulter Jamaica.

As oil importers, they benefit from low crude prices, and, unlike Chile or Peru, they are not dependent on China continuing to consume large quantities of copper and iron ore.

They also stand to benefit from higher U.S. economic growth due to remittances from overseas workers. For the Dominican Republic, these are worth around 7 percent of GDP, whilst for Honduras they make up 17 percent according to official data.

“They tend to live more off tourism rather than commodity exports and their massive remittances help the balance of payments,” said Henry Stipp, manager of the Columbia Threadneedle Emerging Market Bond Fund.

This has also tempted some managers to overweight Jamaica, which restructured its debt in 2010 and 2013. The country is now under an IMF programme, with structural reforms progressing broadly on schedule.

“Fiscally they have to be very careful,” said Sailesh Lad, senior EM portfolio manager for the AXA WF Global Emerging Markets Bond Fund. “People will say it looks like a risky credit - things are not as clean and plain sailing as some of the other countries - but it’s priced accordingly.”

Jamaica returned 9.5 percent in dollar terms last year and in the first few weeks of the year its dollar-bond spreads over U.S. Treasuries have widened by roughly 30 basis points to 496 bps, less than half that of oil producer Russia, which has ballooned by 70 bps to 360 bps.

“No one’s talking about panic-selling in any of these names,” Lad said. He wants to add to some of his overweight Central America and Caribbean positions but tellingly, no one has bonds to offer.

“You’d think in this market downturn it would be easy to buy bonds but we’re struggling. It’s frustrating,” he said.

Some fund managers are also trying to decide whether Venezuela offers a decent risk/reward trade off. Given that it needs an oil price of closer to $100 a barrel to avoid a default this is an option for the brave - but some of its juicy interest bonds are due to pay out in just five weeks’ time.

“Venezuela is very tricky, with oil down here, but we’ve been buying the February bonds,” said Aberdeen’s Edwin Gutierrez. “We don’t think they are going to default by then.” (Editing by Janet Lawrence)

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