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Investors ‘too bearish for too long’ on duration, says EM credit chief

Investors ‘too bearish for too long’ on duration, says EM credit chief

The market fixation with maintaining a short duration stance in advance of rising rates has gone on too long and investors have become too rigid in their outlook.

That is the view of Steve Drew, head of emerging market credit at Henderson Global Investors.

Speaking to Citywire Global, Drew, who oversaw the launch of Henderson Horizon Emerging Market Corporate Bond fund earlier this month, said investors need to adopt a more flexible position.

‘The market has been bearish on duration for too long and we as a company are looking at lower terminal rates than the market is widely expecting. That means, you need to be flexible on duration,’ he said.

‘While the market is sticking to around plus or minus two years in duration terms, we are looking at minus two years up to plus 10 years, which will give us a lot more flexibility in where we are positioned on the credit and duration curve.’

Echoing points made by EFGAM’s Moz Afzal, Drew said investors cannot afford to be blinkered solely by their duration exposure in current market conditions.

‘Investors do need to look at where they stand on duration, because we have been in a 30 year bull market for fixed income and, at some point, rates will start to rise, which will lead to a structural change in terms of fixed income returns.'

‘We have got a more flexible mandate, which means many of our peers are looking at it in a purely directional way and are saying they can only buy bonds at the short end the curve.’

Russian reserve

In the new fund, Drew, who joined Henderson from Thames River Capital in April, said he will be looking at opportunities from across Latin America, Asia, MENA and also Central and Eastern Europe. However, he advised caution in the approach to the Russian market.

‘My view there is you have got to look at Russian liquidity and we don’t know where the sanctions are likely to go, in terms of escalation of the sanctions and also tensions in the region,’ he said.

‘We know liquidity has been very poor to this point and also the main buyer of corporate debt has been the local players, such as local banks, so there has not been much interest from credit investors from outside the domestic market.’

Drew said the only real entry point in Russia at present is through large, state-owned firms, which are assured of liquidity and protection regardless of exogenous pressures.

‘For us, the only way to play Russia is through the quasi-sovereigns. That is until we get more clarity on Russia itself, until then then we will limit ourselves to these quasi-sovereign, state-linked companies, like Gazprom and Lukoil.’

‘However, we are not overweight here, despite being somewhat constructive, as the benchmark weighting is about 5% and our new strategy is going to have around 3%.’

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