Mexico could face a volatile year ahead, but emerging market investors with good market timing stand to reap the rewards of a fundamentally strong market.
That is the view of Citywire A-rated manager Sergei Strigo, who is the joint top-performing manager in the emerging market hard currency sector over the past 12 months.
Strigo, who co-runs the Amundi Fds Bond Global Emerging Hard Currency fund with Maxim Vydrine, said Mexico proved a popular pick prior to Donald Trump’s election victory, but now faces its own election uncertainty.
‘Geopolitics continues to be a challenge, as we have elections in Mexico and Brazil as well. Following a series of rate hikes by the central bank, Mexican debt is now more in the high yielding space, which is uncommon for Mexican bonds.
‘We are also in the middle of Nafta renegotiations, so there could be volatility there. That, along with the elections in the summer, are key concerns to look out for in Mexico. There could be significant volatility here, as well as from Brazil, so the challenge is going to be timing the moves.’
In the Amundi Fds Bond Global Emerging Hard Currency fund, which has $1.1 billion in assets, Strigo and Vydrine currently have Petroleos Mexicanos (Pemex) as the largest single bond holding. It accounts for 6.6% of the fund's exposure.
Strigo, who is head of EMD at the French group, said there is still a strong belief among investors that political risk in one emerging market has a direct impact on other EM nations.
‘One thing that is lost on investors is how distinct the emerging markets are when it comes to political risk, as the elections in Brazil won’t affect Russia in the same way. Mexico wouldn’t impact South Africa, but there is still correlation there.’
Strigo sits first out of 224 fund managers in the EM – Global Hard Currency bond sector for his one-year total returns to the end of December 2017. He returned 21.6%, compared with the average manager's 10.1%.