On Thursday, Pictet Asset Mannagement held a conference at the Hotel Place d'Armes on the issue of Emerging Market Dept: the big question nowadays is are we witnessing a big turnaround in international money markets?
Emerging market currencies continued to weaken in 2015 and into early 2016 while several countries have started rate hiking cycles putting pressure on local bond prices. At the same time, spreads on hard currency debt have widened to 5 year highs. Valuations and yields look historically attractive compared to most other fixed income asset classes, but is this enough given continued headwinds of sluggish developed market growth and few signs of improving emerging market exports?
Andrew Grijns, Senior Client Portfolio Manager within Pictet's Emerging Market Debt team, explored if we have reached the bottom for emerging local currency debt, and asked is Hard Currency Debt attractive with spread levels last seen in 2009? He reviewed both local and hard currency emerging debt markets and shared his convictions for 2016.
He explained how Pictet applies a different approach to many, with around 50% of what's happening in debt markets having noting to do with the economics in emerging markets.
Their top-down view of the macro environment enables them to assess how attrqctive conditions are for taking risk. Also, their understanding of the direction of a country's credit quality enables them to estsablish a bias. In local currency debt markets, currency interest rates afre distinct sources of alpha, which should be managed separately.
Benchmarking and the active shape of trades leads to the compilation of portfolios. Independence of central banks, for example, is essential for monetary policy. Venezuela, for example, is a country that has stoppoed publishing economic date, meaning they have to be on the ground to evaluate risk.
Pictet currently manages USD16 billion in emerging market debt, down from double that a number of years ago, and split between USD8.2 bn in local currency and USD7.2 bn in hard currency debt. He acknowledged that January 2016 was a bad month for the market, but the last couple of weeks have started to see some inflows.
While there has been a bit of recovery in oil prices, the market is still way below levels of a few years ago. Commodoties prices are fluctuating and manufacting sectors in emerging market economies continue to fall. Credit rating downgrades have happened in many countries including Poland and Brazil, meaning there has been little good news last year, and this was still while the USD was stable, influenced by the slow-down in China and the drop in commodities prices. In Russia there was a run on government bonds; he expectts to see a continued contraction in the Russian economy this year. South Africa's economy is suffering now, not helped by the turnover of Finance Ministers there.
He advocated Mexico as one of the best emerging market economies, partly due to its low reliance on commodities, but it does have an oil export market. Indonesia and Brazil are doing well so far this year, as are Thailand and Malaysia. Last year on Emerging USD Debt, Ukraine, Argentina, Belarus, Russia ans venezuela performed best, with Brazil, Kenya and Bolivia performing best so far in 2016.
He emphasised how crucial timing is, with expamples of being underweight and overweight regarding duration.
For the future outlook, he stated that the current cycle is different than before, will sell-offs followed by return investment. Emerging Markets have disappointed for five years, led primarily by negative currency returns. He asked is the change due to changes in policy mix in these economies? In order to become competitive economies internationally they have had to change the way they have been opering and have started to follow international policies instead of their own, as in the past.
Dropping interest rates in emerging markets to stimulate growth, for example, is no longer seen to be an option as the policy makers are concerned that this will affect credit ratings which, in turn, will lead to international investors selling their bonds.
Monetary policies are becoming more prudent, with inflation targeting taking priority over growth which is dependent on structural reform. He did state that weaker currencies provide a long-term opportunity, with no less than over 65 countries providing a wide range of opportunities. Emerging Market Debt is outperforming EM Equities.
Photo by Geoff Thompson: Andrew Grijns, Pictet Asset Mannagement
