Equities were not the only financial asset that had a difficult 2018. Emerging market bonds were also hit by the market jitters that struck risk assets generally. After generating solid returns in previous years, emerging market debt issued in hard currencies such as the US dollar and euro fell by around 7.2% (calculated in euro).
Prices on emerging market government bonds are currently quite attractive Bent Lystbæk
However, following a strong start to 2019, most of the lost ground has been regained and Danske Bank continues to see an attractive return potential in emerging market debt in hard currency, which is also why it is currently overweighted in Danske Bank’s portfolio solutions for institutional customers.
“Prices on emerging market government bonds are currently quite attractive, both from a historical perspective and relative to corporate bonds with the same credit rating. We therefore see a good chance the asset class will perform rather well over the rest of the year,” says portfolio manager Bent Lystbæk, who is co-manager for the fund Danske Invest SICAV Emerging Markets Debt Hard Currency. The fund has a strong track record for emerging market debt in hard currency and a four-star rating from Morningstar.
Below, Bent Lystbæk answers two key questions about the asset class.
In your view, what will have the greatest impact on emerging market debt in hard currency during the rest of this year?
The US central bank signalling there would be no more interest rate hikes this year and at most one next year has eliminated a significant uncertainty factor for the asset class. This leaves three factors that in our view may have a major influence on market developments:
1. THE TRADE WAR. The outcome of the trade negotiations between the US and China is an important factor, and here we expect a trade agreement that both parties can live with and which is satisfactory for the rest of the world.
2. GROWTH SPREAD. Differences in economic growth rates between emerging market nations and developed economies are probably the single most important factor for investor appetite with respect to emerging markets. It is widely expected that the difference in growth rates will widen slightly in the emerging market countries’ favour in 2019.
3. GLOBAL GROWTH. Finally, we have to consider global growth, where recession fears towards the end of 2018 pushed emerging market bond prices down. However, despite a period of weak economic key figures in Europe and China, we expect a pick-up later in the year and decent global growth for 2019 as a whole.
Overall then, our assessment is that political and economic developments look set to be relatively positive for emerging market debt.
Which countries are you currently overweighting most in your portfolio of emerging market debt in hard currency?
We currently favour three countries: Argentina, Mongolia and Georgia.
ARGENTINA’S GREAT UNFULFILLED POTENTIAL: Argentina has a well educated population, well developed infrastructure, a large industrial sector, masses of fertile land and rich deposits of oil, gas and minerals. The country’s huge potential is just waiting to be released under the right political framework – and after decades of poor economic leadership, the Peronists had to hand over the reins in 2015 to the new president, Mauricio Macri, and his reform-minded governing coalition.
However, in 2018 the monumental task of turning the Argentinean economy around ran aground and resulted in the largest aid package ever from the IMF – a whopping USD 57bn. The Argentinean economy remains in the doldrums for now, but we have nevertheless an overweight in Argentinean bonds. The risk premium is high, and we have faith that Macri and his governing coalition will win the election in October and with the IMF’s help get Argentina’s economy on the right course.
MONGOLIA ON THE CUSP OF GREAT PROSPERITY: Mongolia has a small economy but rich deposits of coal, copper, gold and other minerals that represent a value of more than 100 times the country’s GDP. Massive investment projects are now under way to capitalise on these resources and to potentially revolutionise the economy and bring great prosperity to the country. In this intermittent phase, when the investment requirement is large, the country is benefiting from a financial aid package from the IMF, the World Bank and the governments of China, Japan and South Korea.
GEORGIA HAS ADVANCED BY LEAPS AND BOUNDS: Georgia has implemented structural reforms at a cracking pace, taking the country to sixth place in the World Bank’s Ease of doing business ranking. That means Georgia is assessed to be the sixth most business-friendly nation in the world, surpassed only by New Zealand, Singapore, Denmark, Hong Kong and Korea.
This has attracted major direct investments from abroad, which have helped boost the economy. Moreover, tourism is booming and the country has become an important transport hub for the region. Such developments have not gone unnoticed by the bond market, where government bonds are now so expensive that we no longer find them an attractive investment. On the other hand, we see considerable value in bonds issued by certain government-owned and privately owned companies.
Disclaimer: Danske Bank has prepared this material for information purposes only, and it does not constitute investment advice. Always speak to an advisor if you are considering making an investment based on this material to establish whether a particular investment suits your investment profile, including your risk appetite, investment horizon and ability to absorb a loss.
