In light of progressive liquidity withdrawal from the global economy and the rise of country or sector-specific risks, it has become difficult to forecast a clear direction for emerging markets fixed income as a whole. As the AXA WF Emerging Markets Short Duration Bonds passes USD1billion in assets, fund manager Damien Buchet explains why, in our view, the current market environment lends itself to investment strategies focused on short duration emerging markets fixed income instruments.
Damien Buchet, Fund Manager of AXA WF Emerging Markets Short Duration Bonds, comments: “Between May and September last year, emerging market debt endured the worst period of volatility since the 2008 crisis. We believe that the drawn out shift from emergency monetary conditions to normal monetary conditions will cause periods of underperformance across most of the fixed income universe. However, it won’t all be at the same time and in our view there will be periods when valuations become very attractive again – as is possibly the case in emerging market debt right now.
“As the US Federal Reserve exits quantitative easing, the risk of rising interest rates looms somewhere on the horizon, potentially introducing more volatility to the market. We believe that investors wishing to benefit from the long-term growth prospects and attractive yields of emerging markets debt, but who are wary of volatility may find a short duration approach attractive. Underpinned by a thorough research process to identify country or sector specific risks, it can offer a number of advantages; among them: lower sensitivity to interest rate movements, steady income returns, lower volatility and diversification benefits.
Damien Buchet continues: “We believe emerging market fixed income offers long-term income and capital gain potential best captured through a total return approach. By taking an active, conviction based approach we can tap into attractive opportunities for yield and lower volatility particularly in the short duration segment of the emerging market credit.
“Emerging market debt valuations remain attractive, in our view, and, on average, corporate fundamentals have improved. Key this year will be to focus on alpha opportunities in terms of differentiation among countries and sectors. We favour the oil exploration, telecom and property sectors and believe that carry is likely to be the main driver of returns in the first quarter. We are also primarily focused on hard currency, which tends to be less volatile than local currency debt that involves additional risks such as exposure to potentially greater currency fluctuation, national interest rates and capital controls.”
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