Mar 29, 2023
BlueBay Says ‘Boring’ is Best for Emerging Debt as Markets Swoon
(Bloomberg) -- “Boring is good” is the best strategy for emerging-market investors facing concerns over runaway inflation and a global banking crisis, according to one of the top-performing developing-nation bond funds.
BlueBay Asset Management favors debt from countries that are focused on fighting inflation and are sticking to the established rules of good economic governance, said Polina Kurdyavko, head of emerging markets debt and senior portfolio manager in London.
“We just don’t know how growth is likely to behave — what we do know though is that there are some that would cope better than others,” she said in an interview. “For us the actual differentiation comes from the focus on orthodoxy, both monetary and fiscal orthodoxy.”
Emerging-market bonds have matched gains in US Treasuries this year even as fears of tighter credit conditions have whipsawed markets. The highest Treasury volatility in decades is spurring a renewed hunt for alternatives and developing-nation bonds are among the beneficiaries as investors seek shelter from the threat of a banking crisis.
Kurdyavko’s EM Unconstrained Bond Fund has returned 2.1% over the past three years, beating 90% of its peers over the period, according to data compiled by Bloomberg. The fund has risen 1.3% this year.
“In this environment of tightened liquidity, I would favor local currency markets and hard-currency sovereign credit with a sort of barbell approach,” she said, referring to a strategy that typically involves investing in the two extremes of high-and-low risk assets but ignoring the middle.
The fund does this by buying investment-grade sovereigns at one end, and “serial defaulters” that may be trading at distressed levels at the other, she said.
Kurdyavko said the fund also favored hard-currency bonds sold by issuers in the Middle East and commodity exporters.
Here are some more of her investment views:
“In terms of recession, I think it’s difficult to generalize over 75 countries, you know in terms of the recessionary environment that they’re all in. And I guess that’s the biggest beauty of emerging markets, right? You do this, this diversification matters more than ever right now because we are uncertain.”
“Fiscal deficits are likely to tighten in the next couple of years which should be supportive of local currencies. We’re effectively betting on cash flows rather than growth.”
AT1 Debt Fallout
“The biggest impact overall is access to credit will be more difficult for high-risk, high-yield stories regardless of which origin they come from, emerging markets or developed markets. Risk assets will carry higher risk premium and that to me is the impact of higher rates more than events like Credit Suisse.”
(Updates to add year-to-date returns in fifth paragraph.)
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