Country selection has been the key to success for Brett Diment, head of emerging market debt at Aberdeen Standard Investments.
‘Overweight positions in Ukraine, Argentina, Ghana and Russia were key contributors to performance, while being underweight Poland, China and Malaysia was also beneficial,’ says Diment, who is ranked seventh in the EMD local currency tables over both three and five years, see right.
He considers a variety of factors when investing in emerging market bonds and says the combination provides a broad and deep understanding of a country’s key economic drivers.
‘We judge its potential and policymaking, as well as political and geopolitical factors, the commodity markets, and even ESG indicators,’ he says.
As far as bond classes are concerned, Diment says emerging market hard currency debt has enjoyed a strong year, posting solid returns on the back of the global economic recovery.
‘A weaker US dollar has acted as a tailwind over recent quarters, with strong investment inflows and record bond sales,’ he says.
Although he’s positive on the medium-term outlook and believes emerging market fundamentals are in good shape, he says valuations are less attractive since the rally.
‘As such, we have been reducing the duration of our fund and increasing cash balances as precautionary measures.’
He has also been looking to cut some of his high-yielding frontier markets exposure which has also performed well over the last 12 months
‘We’re seeing more value in local currency markets, especially countries with room to cut interest rates to boost growth amid falling inflation, such as Brazil, Peru, Indonesia and Russia,’ he says.
Diment says the IMF/World Bank annual meeting was positive with few clouds on the horizon: ‘In its latest World Economic Outlook the IMF has marginally increased its forecast for global growth and is now expecting advanced economies to grow by 2.2% year-on-year in 2017 and 2% year-on-year in 2018,’ he says.
‘Emerging markets are expected to expand by 4.6% year-on-year and 4.9% year-on-year in 2017 and 2018 respectively.’ Looking ahead, he says investors will view US domestic policy as the key risk to the asset class in the coming months.
‘Given the improvement in emerging market fundamentals in the last couple of years, the fallout if higher treasury yields and a stronger US dollar are sustained should be more limited than the risk-off episodes of 2013 or 2015,’ he says.
Diment says India is a particularly attractive prospect because it has been driving through reforms. ‘The country’s local currency bond is attractive too, given high real rates and a currency which, historically, has exhibited little volatility,’ he says.
The government led by Prime Minister Modi has embarked on a number of reforms to improve the country’s long-term potential and this is already bearing fruit.
‘In the 2018 World Bank ‘Doing Business’ report, India had the largest improvement of any country, moving from 130th position to 100th in the world,’ he says.
These comments originally appeared in a supplement published with Citywire Selector’s December magazine.