London-based Adelante Asset Management hosted a breakfast roundtable on Wednesday 16 January 2013, to outline its strategic overview for emerging markets. The firm’s CIO, Julian Adams (pictured), and portfolio manager of the USD80million Emerging Debt Fund, Timothy Dingemans, hosted the event.
Global growth will likely rise in 2H13 and yields in core developed markets (e.g. US) will experience a slight uptick said Dingemans.
One of the drivers for global growth will be China, thanks to improving intra-Asia dynamics (China exports to Asia ex-Japan rose significantly in 2012). In addition, US homebuilder sentiment is improving and could account for a 2 per cent share of its GDP, potentially rising from around 2.5 per cent to 4.5 per cent by Q4 2013.
Dingemans said that this would be a powerful growth driver but stressed that the firm was not expecting to see any “significant material change” in US Treasury yields: “We are short US 10-year Treasuries and expect yields to potentially climb another 50 basis points by year-end which would take them to 2.40 per cent yield.” US Treasuries were trading at 1.86 per cent yield as of Thursday 17 January.
Adelante expects EM country balance sheets to improve faster than those in developed markets, which will favour local debt and EM currency prices, potentially creating attractive carry trade opportunities and special situations. Dingemans and Adams, whose fund returned 14.49 per cent in 2012 thanks to an array of portfolio positions in Greek debt, highlighted the following EM countries on their radar for 2013: India, Russia, Nigeria, Argentina, Venezuela, and Cyprus.
On India, Dingemans noted that the country’s political dynamics, namely its willingness to introduce reforms, are steadily changing. Last summer saw the ruling Congress Party introduce a number of reforms on foreign direct investment (such as allowing FDI to improve its supermarket and grain storage infrastructure), which led to a 6 per cent rally in the Indian rupee. The fact that a power cut affected 70 per cent of the country last summer prompted Dingemans to posit: “There’s now more of a buy-in that the country needs reform.
“Our view is that opportunities in India are comparable to Brazil a couple of years ago.”
Around 7 per cent of the fund’s portfolio is invested in India, mainly in interest rate swaps and the Indian rupee.
A slightly higher exposure – 10 per cent – is assigned to Russia, where the fund is holding 10-year bonds. There is, said Adams, a structural shift taking place in Russia’s local debt market. Specifically, Belgian bank Euroclear is preparing to begin settling locally issued Russian government bonds (referred to as OFZs) once it receives clearance from the market regulator, Federal Service for Financial Markets (FSFM). The account was opened with Russia’s National Security Depository recently, and it’s a development that foreign investors are eagerly anticipating.
“Yields are currently 6.75 per cent but we think there’s still a way to go as Russia starts to attract stronger foreign investment. We think Russian yields could fall by a further 75 basis points this year,” explained Adams.
As for Nigeria, inflation is starting to fall. Having gone close to reaching 15 per cent in 2H12, Adams said that the 10-year sovereign bonds held in the portfolio were now “yielding around 11 per cent”; stronger bond prices are being supported by the fact that the Federal government are expected to issue 26.5 per cent less debt than 2012.
Adams said that whilst Argentina potentially presented some interesting external opportunities in 2013, the fund had divested its debt positions in the country in the last few weeks.
Argentina is currently embroiled in a legal wrangle whereby US courts have ruled that it is not allowed to pay for new bonds that it has issued without first paying for its old bonds. “Holdout” investors, owed USD1.33billion, rejected a restructuring of its defaulted debt, whose origins date back to 2002, but a US appeals court in November granted Argentina a stay of execution.
“Nobody is quite sure how the legal case will be settled in 2013. It threatens Argentina’s ability to pay for newly issued bonds so it has far-reaching consequences. There could be special situation investment opportunities in Argentina after the final court ruling, one way or another,” commented Adams.
Yields on Venezuelan bonds would further compress if its president, Hugo Chavez fails to make a recovery from cancer, which he is currently being treated for in Cuba, and is sworn back. If there is a re-election process and the vice-president Nicolas Maduro takes office for a further six years it could be a disaster for the country said Adams, who commented: “There’s a need to devalue the Bolivar which needs to be handled properly.” Venezuelan 2022 government bonds have rallied hard in January, sending its yield to a record low of 9.6 per cent.
Cyprus could be an interesting situation in the next month following its presidential election on 17 February. The frontrunner, Nicos Anastasiade, backs a bailout plan – which could rise to EUR17billion - for Cyprus’s banks, which have booked major losses due to exposure to Greece. Cypriot bonds are mainly short-dated (10-year) and have been yielding around 14 per cent. If the country cuts a deal with the EU troika to recapitalize the banks it would result in the shorter-term market bonds being serviced fully, said Adams.