• Barings’ investment strategy favours bonds issued by highly rated and fiscally sound emerging economies, such
as Mexico, Hungary, Poland and Brazil
• The Baring Emerging Market Debt Local Currency Fund returned 5.7% in the third quarter versus 4.8% for its
benchmark index
Emerging market bonds and currencies are benefitting from a more benign risk environment, according to Baring Asset Management (Barings), the international investment firm. Investors are recognising the income generating potential of emerging markets and the superior growth prospects for key emerging markets and regions, particularly when compared with the fundamentals of developed fixed income markets. Barings expects both emerging market bonds and currencies to continue to be well supported.
Thanasis Petronikolos, Investment Manager, Baring Emerging Market Debt Local Currency Fund explains, “Over
the summer months we have seen a continued deceleration in global economic activity. In the face of this downward trajectory, central banks across the globe have stepped up support through further easing measures and this has led to strong performances from riskier asset classes. Looking ahead, we remain positive on emerging market bonds and currencies. While interest rates in the developed world remain very low, emerging market central banks generally have the potential to significantly reduce rates if needed.
“In addition to creating a more benign environment for risk assets, the recent announcement from the Federal Reserve in the US could prove the catalyst for a further period of appreciation. Previous rounds of quantitative easing have been supportive for risk assets, with much of the additional liquidity provided by central banks finding its way into emerging debt and currencies.”
Barings’ investment strategy for the Fund favours bonds issued by highly rated and fiscally sound emerging economies, such as Mexico, Hungary, Poland,Brazil and South Africa.
Thanasis explains, “In these markets, bonds and local currencies look undervalued on our scenario-based analysis. In the case of Hungary, we believe there is significant potential for Hungarian government bonds to converge towards yield levels on offer from German bunds over the long-term. Following a period of strong performance we have slightly reduced our exposure to Mexico and invested the proceeds into Malaysia. However, we remain positive on Mexico and we expect the market to perform well due to its linkages to a relatively robust US economy.
“In terms of currencies, we expect emerging currencies to benefit over the long-term from wide interest-rate differentials, strong capital flows and positive external balances. We also believe that a number of Asian currencies should also produce attractive risk-adjusted returns as they benefit from lower volatility compared to other emerging markets.”
Year-to-date, the Baring Emerging Market Debt Local Currency Fund has returned 12% (as at 30 September 2012).
Performance benefitted from Barings’ cautious view on Thailand and Malaysia, and overweight positions in South Africa and Hungary. Yield curve positioning in Turkey and Hungary contributed positive returns due to respective underweight and overweight allocations to the middle sector, and a long duration position in Poland added value.
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