Hello and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall
and I'm here today with Claudia Calich, Manager of the M&G Emerging Markets Bond Fund.
Hi, Claudia.
Hello.
So, it's our Emerging Markets Week this week and we can't just focus on equities, although
perhaps they are the better known way to access the emerging growth story. Fixed income is
what we're here to talk about today. Emerging markets bonds were extremely popular a number
of years ago. They were sort of the thing that everyone was talking about when interest
rates started to fall in the U.K. and people were looking for a different way to get yield.
But since then there have been a number of reasons, the taper tantrum for one, which
has meant that they've fallen out of favor. Presumably, this has actually been quite a
good thing for an emerging market bond manager because that's meant opportunities?
Yes, and I think we clearly saw that. As you mentioned, during the taper tantrum we had
very sharp correction, very, very substantial inflows go into the asset class that corrected
within a couple of weeks. As a consequence, we saw asset prices – we had actually huge
sell-off as managers had to sell the holdings to basically cover redemptions on the funds.
I see the pace that we have currently is actually quite good for emerging markets in the sense
that the last thing I would like to see is major amount of money coming in just to see
the same amount of money leaving if you have any particular headache – or headline, better,
or any other fears in the market. So, I would rather see small and steady flows as opposed
to those big swings that we saw in the past.
We did see about US$4.5 billion leave the region – leave the sector rather, emerging
market debt, in May. But when you look at the numbers, this has meant that obviously
with low demand we have some quite attractive yields. I mean, Turkey 10-year government
bond is around 9.5%, something that everybody in the U.K. would love to be able to get on
deposit, not for some time I'd fear. Where are you seeing the best opportunities? Are
you attracted by rates like that in Turkey?
Turkey obviously is a difficult situation because they still need to hash out the correlation
in the politics in the very near term. They are benefiting potentially from items such
as lower oil prices and so forth, but in my view, that's taking a back seat at the moment.
So, politics will remain critical for countries like Turkey. But instead, I'm focusing on
a few opportunities in, for example, in terms of themes; one is the U.S recovery, strengthening
the labor market in U.S., pushing up wages which arguably that's something the Fed is
worried about. But as an investor I'm actually happy for a few countries. So, the U.S., for
example, has a very strong labor force of immigrants from Central America, so countries
like Honduras, Dominican Republic, Guatemala, all those immigrants, they send money home
and that's really supporting those local economies. So, that's one of the areas that is one of
the key overweight in the portfolio at the moment.
We've mentioned there regions. Is it as simple as sort of putting a pin in a map and saying
that's a great place for fixed income or it is much more about thematics, like you mentioned
there?
Yeah, I'd say emerging markets seem very much in the theme because you cannot just generalize
Latin America. You have some really good and improving stories and you have some absolutely
basket cases. The same thing with Eastern Europe. Asia is also, they are all different
in terms of politics, in terms of growth, whether they are commodity importers or exporters.
So, you really have to take a much deeper dive into the country themselves and see what
are the key drivers. So, I never really – very rarely I will look at a region as a whole.
I would just look at the smaller pieces that comprise that region.
Of course, fixed income investing is a very different thing to equity investing, but the
thematics which drive them can be the same. For example, we've seen some countries do
very well at currency weakness when we're looking at equity investment and I believe
you've found fixed income opportunities that also benefit from that?
Correct. Yeah. So, that's the other theme I'm playing the portfolio which basically
underweight currencies but also more importantly, overweight some of the corporates what would
stand to benefit from a weaker currency. So, basically, exporters that are gaining from
having more revenues in either dollars or Euro depending on the company but most of
their costs being in local currency. So, they are actually benefiting quite a bit. So, we
have a few names. For example, in Mexico we have an auto part producer; we have Brazilian
exporters in the beef sector. Similarly, in South Africa, we have a pulp and paper name.
So, all of those companies, they are actually doing much better despite the currency weakness.
In this case, it's actually with the currency weakness.
What about the third theme for the portfolio?
The third theme is really idiosyncratic stories, stories that would be much less correlated
with what's happening whether it's in China or in Greece, for example and much more correlated
with its own dynamics, whether it's politics or economics. So, countries such as Ukraine,
which is undergoing a debt restructuring, Pakistan, Sri Lanka. So, those are very much
stories that are almost on their own. Of course, those are weaker credits. So, if you have
a very strong bout of risk aversion, those countries temporarily, they would underperform
but on a longer term basis, if you pick the correct countries, you did the homework, there
are opportunities to be found. You just have to look very closely.
I mean, you mentioned Greece and China there. They are the two big stories of the week,
in fact, probably the year. Are you looking for opportunities there or are you just sort
of staying clear?
Greece for the time being I'm not. Obviously, it's a very difficult political decision for
the Europeans and as a consequence, for investors it's very difficult to (trade) those headlines.
In terms of China, I have some exposure but relatively defensive position on two corporate
names that we're comfortable with. One is a car rental company that basically benefits
from the domestic consumption, in this case, car rentals and the other is a food producer
which is also then very stable demand, given it's a non-cyclical sector. I'm avoiding the
real estate sector or any other companies, SOEs or companies that could be battling back
that either through the deleveraging process or the slowdown in the economy.
Claudia, thank you very much.
Thank you so much.
This is Emma Wall for Morningstar. Thank you for watching.