South American countries are worth tapping into despite political upheaval. According to Pierre Verlé and Charles Zerah.
During a press briefing the managers who look after the Carmignac Global Bond fund said emerging market investments in countries like Argentina have been big political stories rather than economic.
‘The political landscape of Argentina has pushed us to look at Argentinian bonds. We when first started looking at them, they were yielding 7%. We would like to hold these bonds for as long as President Macri is in power.’
Pierre Verle head of credit at the French asset manager said most managers have not yet started to look to Argentina.
‘The day following the Argentinian elections we met with oil companies such as YPF to make sure we could sit on the front row of any releases. YPF were the first to issue bonds following the election and issued them at a higher yield than Argentina.’
The fund has 17.21% allocated to emerging market government bonds, 12.04% of which is allocated to Latin America. The developed countries corporate bonds sector holds 18.58% of the fund with a 1.67% allocation to energy stocks.
Away from Argentina the managers said despite political unrest Brazil is attractive to them as it offers 6% real yields. The managers also favour other Latin American countries such as Mexico.
‘When we look at inflation linked bonds in Mexico, they offer us 3% real yields compared to zero in the US. Mexico is not a traditional commodity exporter despite oil being a major part of fiscal revenues of the government.’
'When we look at our emerging market investments in global bonds we see that Brazil is our biggest position in Latin America followed by Mexico, we also hold significant positions in Qatar.'
It terms of the outlook on the rest of the world the managers believe there is more political risk to come.
'We have had the shock of both the Spanish election and the UK’s decision to leave the European Union. Once the campaign trail kicks off in July for the US presidential race we are predicting that more shock will follow.’
The managers said the fund needs to have exposure to safe haven currencies during this time of developing political risk.
‘What has happened recently in the UK will impact the economy for the next 5 years.’
‘Several months ago we started to think about how we should change the construction of the fund, we looked at the potential risk of a recession and a contagion that might catch the rest of the Eurozone.’