A Hot Emerging-Market Bond Strategy Comes Back on Coronavirus Fears
The emerging-market bond strategy that delivered a bumper return last year is regaining momentum as the new coronavirus spreads.
Going long duration in a bet the outbreak will slow global growth and convince central banks to ease policy has already returned more than 5% since the start of 2020, after surging 26% last year. Lombard Odier, Pictet Asset Management and Emso Asset Management all say they’ve revised their portfolios investing in developing-economy debt to boost duration, which measures a bond’s sensitivity to changes in interest rates.
“A situation like the coronavirus basically impacts global growth that is already quite fragile,” said Dhiraj Bajaj, a fund manager at Lombard Odier in Singapore, whose Asia debt team oversees $5 billion. “We increased duration last year as we felt global growth will slow. We increased again in January, given the virus situation and to protect our portfolios.”
Emerging-market bonds denominated in the dollar due in 10 years or more have returned 5.5% this year, according to a Bloomberg Barclays index that includes sovereign, quasi-sovereign and corporate debt. The index rallied from December 2018 through August last year as the U.S.-China trade dispute fueled concern global growth would slow, only for gains to ebb when the two sides reached a phase-one deal. The spread of the coronavirus has seen it gather pace again.
Lombard’s Bajaj recently bought the debt of quasi-sovereigns issuers in Thailand, Indonesia and India with maturities of 30 to 40 years. His main fund, the $2.8 billion Lombard Odier Asia Value Bond, has a duration position of 5.9 years, compared with 4.5 years for the benchmark it uses to gauge performance. The fund has outperformed 98% of its peers over the past year, according to data compiled by Bloomberg.
The spread of the epidemic needs to be watched closely as it threatens the world economy, Federal Reserve Chairman Jerome Powell told U.S. lawmakers last week. The Thai and Philippine central banks both cut rates this month as the epidemic hammered Asian tourism, travel and business confidence, while policy makers in Malaysia and Singapore have also signaled a willingness to ease following the outbreak.
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Pictet has boosted its overweight duration position in developing-market bonds, partly on the view the coronavirus will convince central banks to become more accommodative.
“We like 30-year bonds, 40-year bonds and even in some selected cases, 100-year bonds,” said Guido Chamorro, co-head of emerging hard-currency debt in London at the company that oversaw $208 billion at the end of 2019.
Chamorro said his team has been building its overweight duration position since last year as the Fed pivoted to a dovish stance, and is focusing on investment-grade countries such as Peru, Panama, Mexico, Romania and Qatar.
For Emso Asset, value lies in the 20- to 30-year bonds of BB and BBB rated sovereigns such as Indonesia, Paraguay and Peru, according to Jens Nystedt, a fund manager in New York, who helps manage $6 billion. Longer-maturity bonds in emerging markets offered the best value even before concern about the coronavirus surfaced because of their attractive spreads, he said.
And that means such trades will probably remain rewarding even if the coronavirus outbreak fades given the global growth outlook, according to Lombard’s Bajaj. There’s no reason for the Fed to raise rates and the two largest emerging Asian economies — China and India — are both slowing, he said.
“Even if the virus goes away, and we certainly hope it will, it will not meaningfully change the global picture for fixed-income investors,” Bajaj said.
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