SINGAPORE: Recent volatility in market bonds has been exacerbated by the “sell-off” of exchange-traded funds (ETFs) as investors have left the asset class, says William Blair’s Marcelo Assalin.
Passive managers have been a “very damaging force,” abandoning assets at all levels, and the “disruption” has been pronounced on less liquid frontier sovereign bonds, pushing many of the industry to problematic levels, the fundhouse’s head of emerging market debt said.
“Right now, we’re seeing disruptions in the market, led by passive managers promoting at all costs. This is obviously what happened in July and I am concerned that it will return in the coming weeks if market volatility continues at this level,” Assalin told Citywire Selector’s sister. site, Citywire Asia.
JP Morgan’s emerging markets index plunged just over 10% in June and the first part of July, threat assets sold strongly due to inflation fears. The benchmark index is now down more than 23% since last August.
Emerging market debt ETFs have proven popular with investors, offering simple to the asset class. and $3 billion.
Its recent sell-off has intensified losses in some individual bonds, but has also created undervaluation opportunities for active investors.
Assalin, who co-manages William Blair’s emerging market debt fund, said the valuations are “extremely attractive” after being traded over the past two years.
COVID-19, the war between Ukraine and Russia, the slowdown in Chinese expansion and the strength of the US dollar, as well as emerging rates and inflation, have weighed heavily on sentiment, offering the “most negative mix of factors” it has noticed in more than 25 years of investment.
Spreads have skyrocketed to 500 base problems on average, to around 300-350 base problems historically.
“The pandemic has created a basic deterioration in credit quality, but spreads are expected to be slightly above the long-term average, not particularly above,” he said. “Emerging market valuations are incredibly attractive. “
Dimitry Griko, citywire’s AAA-rated manager of EG’s emerging markets high-yield corporate debt fund, also believes the market is bottoming out. It encourages investors to review the elegance of assets for returns that outpace inflation.
“Emerging markets are paying a significant pullback and Array. . . in the coming years, it will be able to achieve double-digit retracements and temporarily all those losses,” he said.
The Federal Reserve’s Jackson Hole summit triggered a new sale of threatening assets last week after Chairman Jerome Powell issued an aggressive tone, warning of “pain” to come as the central bank continues to fight inflation.
Assalin admits the reaction “surprised” him, given the Federal Reserve’s consistent stance. and food costs have fallen in recent months.
This would merit allowing a pause in financial policy tightening at the end of the year that would cause the dollar to “lose height” and emerging-market bonds, he said.
The rise in commodity costs through the war in Ukraine, while negative for threat appetite, has been a clear positive for many emerging markets. Assalin, which invests mainly in hard currency sovereign bonds, increased the strategy’s exposure to oil and fuel exporters Nigeria, Angola, the United Arab Emirates and Kazakhstan earlier this year.
“In the high-yield component of the market, credit spreads are particularly superior components of what we think is the right price right now,” he said. creditsss extends above 1,000 basis points, which was a significant amount, and in many put options we do not expect any creditsss event.
“All of these countries are reaping benefits from basic gains due to emerging oil prices,” he said, adding that Angola has reduced its debt-to-GDP ratio from more than a hundred percent to less than 60 percent in the past two years.
William Blair was affected by his exposure to Russian bonds. The fund house, which underweighted the country in February at the start of the conflict, sold its foreign exchange positions when the invasion was announced.
It is still in the process of reversing its exposure in local currency, the facility agreed through the U. S. Treasury. The U. S. Department of Homeland Security was earlier this month. Provided through major Wall Street banks, it allowed asset managers to take bonds off their books, but at a rate of “about 80 percent,” Assalin said.
Elsewhere, Egypt is an unloved country that Assalin plays on the sidelines. It has been hit hard by wheat value inflation, but enjoys “very strong support” from the International Monetary Fund and Saudi Arabia, which it says is not reflected in existing spreads.
Assalin also made a countercurrent bet on Argentina. For many, it remains a pariah of bonds beyond defaults, which are still being restructured, and lately trades in the 20s. But Assalin argues that he is reaping benefits from emerging food and energy prices, and that his bonds will be valued more. after the last debt restructuring.
Griko is also locating opportunities in the South American country, where he has an allocation of 12%, acknowledging that the outlook remains “terrifying”, due to its precarious macroeconomic position. It favors corporations that have “limited dependence on the government and have liquidity. “in hard currency that can fully pay off its debt. “
Michael Arno, co-manager of the Legg Mason Brandy Wine Global Defensive High Yield fund, looks at local currency bonds more broadly, when yields have averaged more than 9% historically, “term yields have tended to be compelling. “
“Some signals remain challenging and situations may get even worse for emerging markets,” he said.
“We find the valuations of some emerging market local currency bonds very attractive, with the prospect of false yields as the situation stabilizes and improves. “
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