There’s a once-in-a-decade opportunity out there, said credit ratings agency S&P last month – and it’s not in equities. With many emerging-market countries boasting high reserve levels and strong growth prospects, their government debt is throwing up opportunities. A wave of distressed selling, mainly from hedge funds, means that some sovereign debt markets are looking very attractive, says Richard House, manager of the Threadneedle Emerging Market Bond Fund.
The fund is up 19.6% over one year and House remains “quite bullish” on the sector. Many markets “have sold off a lot”, he says, to the point where investors “overestimate the risk of default”. In fact, “besides baskets cases like Ecuador, we’re quite optimistic”, especially on countries with low external debt and high reserves. As such, he avoids investing in the CIS countries, such as Kazakhstan, “that went on a huge corporate borrowing binge”. He prefers to focus on big countries, such as Brazil and Russia; 14.7% of the fund is invested in the latter.
“The Russia story isn’t as great as it was. But at current spreads, it’s very cheap. The government seems to have finally stopped intervening in the currency markets to support the rouble,” he says, so the downward pressure on its currency reserves has eased. What’s more, over four years the cost of insuring against a default on Russian government bonds (the CDS spread) is 640 points. Meanwhile, similarly-rated Colombia is on 330 and Turkey, which is rated two or three notches lower, is on 350. “So Russian sovereign debt looks very cheap.”
Contact: 0800-068 3000.
| Threadneedle Emerging Market Bond Fund top ten holdings | |
|---|---|
| Name of holding | % of assets |
| Russian Federation 7.5% 31/03/2030 | 9.5 |
| US Treas NTS 3.875% TIPS 15/1/09 | 8.3 |
| Brazil (Fed Rep of) 11% 17/8/40 | 8.0 |
| Mexico (NTD Mxcn STTS) 6.75% NTS 27/09/34 | 5.5 |
| Russia 11% BDS 24/7/2018 | 5.2 |
| Brazil (Fed Rep of) 8% NTS 15/01/18 | 4.5 |
| Mexico (NTD Mxcn STTS) 5.625% NTS 15/01/17 | 3.9 |
| Turkey (Republic of) 8% NOTES 14/2/34 | 3.3 |
| Turkey (Republic of) 7.25% NTS 15/03/15 | 3.1 |
| Venezuela (Republic of) 9.25% BD 07/05/28 | 2.8 |