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AAA-rated PM: location problem persists in EMD

AAA-rated PM: location problem persists in EMD

Many corporate bonds within emerging markets are much more diversified than their home countries would suggest, according to Investec’s Victoria Harling.

‘It’s important to look at the different changes and impacts to a home markets currency, how this could benefit or hurt some of the corporate earnings that we see, or whether it makes the issuer more competitive on a global basis,’ she said at a roundtable event in London.

Citywire AAA-rated Harling, who manages the Investec GSF Em Mkts Corp Debt fund alongside A-rated Peter Eerdmans, said many of these companies could become more attractive as costs shrink.

‘For EMs in 2018 I think we have to be nimble and focused on news flows, but at the same time very much factoring in that we expect growth to remain positive.

‘You have to overlay political risk with what is occurring from a global perspective. You have to appreciate that politics often plays a much slower moving part in the deterioration of a fundamental situation, global economic tailwinds are carrying through a lot of the positive economic growth in EMs.’

Mispricing mania

Harling, who currently has around 4.1% of the fund allocated to the UAE, said EM companies are very often mispriced due to their location, and highlighted one Dubai-based company as a clear play on this EM mispricing.

‘A classic example of a company that has been mispriced is DP World, it owns Thames Gateway in London and is a company that operates with over 40 other companies. It’s a ports business, with over 80 ports worldwide, but is classified as a Middle Eastern company.

‘As a result, the discount in yield it gets versus developed markets means you can be paid quite handsomely for owning it. Due to the jurisdictions in Dubai, you will get paid roughly a whole percentage point more.'

Harling said this is true for many companies in her universe and highlighted a Brazilian company which is benefitting from this mispricing trend.

‘Braskem is a petrochemicals business operating in Brazil. There were rumours that some US firms were going to bid for the company and then suddenly the market decided the premium was too high. This credit trades around 100 basis points wide of its potential.

‘This is the sort of discount that already exists in emerging markets. What we have previously seen is that a lot of the companies, because of their geographic diversification and their footprint, actually managed to lower their costs.

‘They become more competitive and typically run more conservative balance sheets to protect themselves from downturns, proving that they are quite resilient,’ she added.

Over the three years to the end of October 2017, the Investec GSF Em Mkts Corp Debt fund returned 14.23% in US dollar terms. This compares with a 14.04% rise by its Citywire-assigned benchmark, the ICE BofAML EM Corporate Plus TR, over the same time period.

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