Top emerging markets bond manager seeks hidden gems in frontier markets

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Fed up with the U.S.-China trade war, Claudia Calich, a top emerging markets bond manager, is finding hidden gems in frontier markets less affected by the conflict.

Ukraine, Nigeria and Kazakhstan offer opportunities because local developments dominate the direction of their markets, said London-based Calich at M&G Investments. That makes their currencies less vulnerable to the direction of the dollar and changes in investor sentiment caused by the trade dispute.

The fund manager has beaten 93% of her peers in the past three years based on the performance of the $1 billion M&G (Lux) Emerging Markets Bond Fund.

“The dollar view is not as critical for these types of currencies,” said Calich, who helps manage $2 billion of emerging market bonds. For these trades, it “doesn’t matter what happens with the U.S. and China in the near term.”

Tariffs implemented between the U.S. and China are holding back the global economy, which is currently at a “precarious stage,” IMF’s Managing Director Christine Lagarde had said. While the two agreed on a trade truce over the weekend, strategists and investors are worried that core issues haven’t been resolved and there is a risk that negotiations will once again fail.
“Next week, there could be something else from Trump and he’s changed his mind,” Calich said.

In the dollar-bond segment, frontier-market debt are headed for their best performance in two years. They’ve handed investors a return of almost 14% this year, compared with a loss in 2018, according to JPMorgan Chase’s Next Generation Markets Index.

Calich added to local-bond exposure in Ukraine even before the landslide win of comic Volodymyr Zelenskiy in the presidential election in April. He is appointing the right people to do the job and is committed to IMF reforms, Calich said. The Ukrainian hryvnia is the fourth-best performing currency in the world against the dollar this year, data compiled by Bloomberg show.

Meanwhile, Africa’s biggest oil producer, Nigeria, offers high interest rates and inflation that is trending lower, she said. A 10-year naira bond yields more than 14%, while inflation eased to 11.4% in May from a recent peak of 18.7% in January 2017.

Calich raised her holdings in Nigeria’s domestic bonds after the re-election of Muhammadu Buhari as president in February, on the expectation that central bank Governor Godwin Emefiele will be given a second term. Emefiele, who was reappointed in May, has been able to keep the volatility in the exchange-rate low, she said. The naira has gained about 0.6% this year against the dollar.

Elsewhere, Kazakhstan, another energy-rich country, has a high-level of foreign exchange reserves, attractive yields and its “path of change” is now clearer with the appointment of new leaders, according to Calich.

For now, a scenario of lower growth and easy monetary policy is “actually still an OK environment for emerging markets”, the M&G fund manager said.

“It’s only when there’s a large recession that prompts risk aversion and a lot of weakening of the currencies,” Calich said. “That’s when emerging markets normally don’t do well.”

Bloomberg News
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