Barings believes there are some interesting investment opportunities within the asset class based on attractive valuations and corporates with strong balance sheets.
Ece Ugurtas, Head of Credit and manager of the Baring High Yield Bond Fund explains: "At present we have a relatively high cash position within the Fund which has allowed us to take advantage of the market weakness and we have started to buy selected names that, in our view, have become attractively priced as a result of this weakness.
"The European high yield bond market has been demonstrating vulnerability to recent events amidst the sovereign debt crisis, underperforming both the US and the UK high yield markets. As a result valuations have become more attractive across Europe. However, with uncertainty surrounding a number of Eurozone members and the impact of imposed fiscal consolidation, we remain cautious in the short term. Our exposure to European peripheral names remains extremely low.
"While we have not made significant changes to the fund in the very short term, we have begun to buy some high yield names out of cash. We have been continuing to monitor macroeconomic and political developments closely and remain alert to take advantage of any investment opportunities as valuations permit.
Ece concludes: "Credit fundamentals are strong with low levels of leverage, high cash levels relative to debt and limited near term maturities. Valuations are discounting an excessive default rate environment. As such we believe there is significant upside in terms of spread compression".
HIGH GRAIN PRICES TO UNDERPIN STRONG FUNDAMENTALS FOR AGRICULTURE SECTOR
Barings believes demand for grain is being driven by the growing global population, increasing protein content in the diet of developing countries and the market for biofuels, which is legally mandated in countries such as the US.
Says James Govan, co-investment manager of the Baring Global Agriculture Fund: "The elevated price environment for grains has improved farmers' profitability, which benefits upstream sectors with farmers incentivised to maximise production through applying optimum levels of fertiliser and using the best seeds. Farmers have also been using their strong financial position in terms of profitability and balance sheets to purchase agricultural machinery, and we have seen strong results from companies such as Deere, CNH Global and AGCO.
"We believe grain prices should remain high from a historical perspective for the foreseeable future. A good measure of tightness in the grain market is the "stocks-to-use ratio", which gauges the level of inventories to consumption. According to the World Agricultural Supply and Demand Estimates published by the United States Department of Agriculture, the global grain stocks-to-use ratio dipped to 19.8% in July, against a 25 year average of 25%. Overall, we think that elevated food prices are needed to encourage investment to boost supply, and this should lead to a strong environment for agricultural products and services over the long-term.
On the strong fundamentals for agriculture, James continues: "We view structural long-term demand for agriculture as being driven by three key factors: food, feed and fuel. We will have more mouths to feed, as the UN estimates that we will have a global population of over 9 billion people in the world by 2050. Given the rise in global population levels, the per capita amount of harvested land has fallen even though the amount of agricultural land has actually increased in the last five decades.
"Meanwhile there has been a significant increase in meat and protein consumption especially in the emerging world. As incomes rise and diets change, especially in highly populated countries like China and India, an increase in fish and meat consumption will put fresh demands on the grain market.
"Biofuels will also continue to be a strong underpin to the agriculture investment case over the medium-term. Our geographic exposure in this instance is dominated by North America."
The Baring Global Agriculture Fund has the ability to capture the long-term growth of agricultural assets by investing in companies whose earnings stem from any sector-related part of the cycle - from the farmer improving productivity through to the grocer selling the produce on to the consumer. This means exposure to upstream companies specialising in fertilisers and machinery, through to the midstream and sectors involved in grain handling and logistics. The fund also has the flexibility to move downstream, where food manufacturers like Kraft continue to benefit from growing consumption patterns.
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