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Promeritum bets on EM debt following multi-year gains

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London-based macro hedge fund Promeritum Investment Management is betting on a further rally in distressed emerging market (EM) sovereign funds in 2024, having posted a record 16% return in 2023, according to a report by Bloomberg.

The report cites a client note from Promeritum, which has reported annual gains since launching in 2014, as revealing that the firm attributes its 2023 performance — nearly double the 8.8% advance posted by the Bloomberg index for hedge funds focused on EM debt — to Sri Lanka’s debt restructuring, Tunisian bonds and the Nigerian naira’s devaluation.

The firm now believes that similar gains are in stock for 2024 as Sri Lanka, Ghana and Zambia conclude debt restructurings — potentially sparking a new bond rally — while slowing inflation could serve as a tailwind for local debt from South Africa to central and eastern Europe.

The report quotes Pavel Mamai, Managing Partner and Co-Founder of Promeritum, as saying: “Once the restructuring happens we definitely expect the next leg [of gains].

“We believe that the restructurings are likely to be on better terms than what the market currently assumes. There’s still some trades on the distressed side, some prices which have not reached the full potential.”

According to a Bloomberg index tracking sovereign dollar debt, the best gains in EM debt year-to-date are led by Ecuador with 30% — having restructured its bonds in 2020 — followed by Egypt and Bolivia.

South Africa accounts for 23% of Promeritum’s investments, followed by Sri Lanka at 13%, Tunisia at 11% and Nigeria at 8%. The fund’s South African bet hinges on a fiscal rule that it believes will help stabilise public finances.

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