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Three ways to play EM corporate debt

Three ways to play EM corporate debt

Citywire A-rated Yerlan Syzdykov believes private companies in the emerging world are proving to be better allocators of capital than their respective governments, with several opportunities arising here.

Syzdykov, who runs the Pioneer Funds - Emerging Markets Bond fund, is exposed to corporate debt of companies which, he said, some of his peers would judge as risky in the current environment.

‘One important feature here is that, unlike sovereigns, most creditors tend to align with investors because the market is their primary source of capital, and in most EM jurisdictions shareholders stand to lose their businesses once they default,’ he told Citywire Selector.

‘Sovereigns rarely lose their sovereignty despite debt restructurings, while some politicians have even gained from them, such as Ecuador or Argentina. If we can find well-managed credits with solid fundamentals, we can often identify a superior return stream versus the traditional sovereign story.’

Backing Brazil

Syzdykov said credit offers investors the opportunity to achieve more optimal positioning around a particular country’s investment theme. That’s why he is overweight Brazil, even if the country faces a number of challenges and is unlikely to avoid a second recession in quick succession.

‘We have chosen to play the story in a couple of ways. We believe Petrobras will be supported by the government and will not default in the near-term, so we are happy to hold some short-term exposure to play attractive yield. Given that Brazil remains export competitive, we then like agricultural exporters.’

An example here, he said, is Marfrig, which is the fourth biggest beef producer in the world. ‘Here we pick up around 700 points of spread. The name has been resilient over the period, and currently trades around par.’

‘So what is in the price? Well, Marfrig is a globally competitive protein producer, and they export to a number of growth markets around the world.’

Syzdykov said the price reflects a market expectation of the company continuing to execute well, while benefitting from a strong competitive position as new markets open and demand remains strong.

‘If Brazil’s currency continues to weaken, this should not impact Marfrig’s servicing capability because the company earns revenues in hard currency,’ he said, while remaining cautious on the country at a macro level.

'Political changes in Brazil may take much longer time than the market started to price in recently. We therefore remain sceptical about a quick and painless political solution and therefore cautious.’

Surprise stories

Timing of moves has also been important, Syzdykov said, with exposure to previous ‘no-go zones’ aiding short-term performance.

‘We were generally fortunate in that regard. Our positioning in the good surprise stories like Ukraine and Russia had a strong positive impact on our performance, while weak energy prices were a bad surprise for us in our positions in oil and related services in Mexico and Brazil. Elsewhere, we avoided weak Sub-Saharan Africa countries.’

The fund is neutral on Asia but ‘constructive’ on China, Syzdykov said, which is balanced against an underweight in Malaysia and the Philippines. In China, he holds banks, utilities and real estate, while in the Philippines there is consumer and sovereign exposure.

African expectations

A key opportunity for corporate investors is Africa, Syzdykov said, are Nigerian banks. ‘At the sovereign level, Nigeria is under pressure because of the fiscal impact of a decline in oil receipts.’

‘But Nigerian banks are still well-capitalised and offer an attractive risk/reward option in the region. The market has been very quick to push Nigerian bank credit towards distressed territory. Our observation is these expectations look exaggerated.’

In addition, the fund is bullish on the United Arab Emirates. ‘For example, we like Dana Gas, which we added to the portfolio last year. What we saw then was a story whereby the market was applying a heavily negative view toward an issuer that showed indications of deep value.’

‘The bonds offer a nominal yield of 18% at the current 88 cents price. Elsewhere in EMEA, we are underweight in South Africa, Poland and Hungary. We are overweight in Brazil and Argentina, neutral in Venezuela, and underweight Mexico, Chile and Panama to compensate.’

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