The volatility rocking the markets for roughly the past two weeks hasn't beaten down emerging markets, which according to Schroders portfolio manager Jim Barrineau are now offering more pockets of opportunity.
Speaking at Schroder's annual fixed income roundtable, Barrineau said that in periods of volatility investors have to focus on what's happening to the US dollar to gauge how emerging markets will fare.
‘We’ve seen about a 2% appreciation in the US dollar and about a 2% drop in the local currency index for emerging markets this month,’ said Barrineau, Schroder's co-head of emerging market debt.
‘However, that was preceded by a 5% rise in the local currency index in January. So we haven’t really seen this precipitous drop in FX in emerging markets. We haven't seen a precipitous rise in the US dollar, so overall the volatility has not disproportionately affected emerging markets.’
If anything, the volatility has opened up value in emerging markets for the first time in a while, said Barrineau, who runs vehicles such as the Schroders Emerging Market Bond fund.
He pointed out that some sovereigns have been trading at 7% yields up from about 6%, and that Egypt, for instance, was set to issue a 30-year bond at 8% on February 13.
Despite the opportunities, Barrineau is being selective with his picks in part because massive ETF flows in the past three years have stretched valuations in the sovereigns market, he said.
Investors reluctant to buy sovereigns because of tight spreads can still access a country’s yields through corporates, he said.
‘There’s a 93% correlation between the corporates index and the sovereign index so most of your returns are determined by country selection,’ Barrineau said.
Turning to his specific picks, Barrineau said on the local currency side, Indonesian sovereigns given the country’s strong growth prospects and yields of about 7%.
Asian corporates also look attractive, as their spread to US Treasury bonds is about twice that of American firms with similar ratings, he said.
In Central Asia, he said he’s finding ‘one-off’ opportunities in Tajikistan, while in Eastern Europe he favors Ukraine. Russia, meanwhile, doesn’t look attractive on the dollar side, but Barrineau holds ruble-denominated debt because he said the central bank has ‘tremendous scope’ to cut rates.
In Latin America, he said he likes Mexico’s state-owned oil company Pemex, which he thinks has gotten disproportionately hit by the recent market shakeup. He said he also favors corporates in the Andean region.
Overall, Barrineau cast emerging markets in a positive light and said he’s hunting for more opportunities.
‘We’re kind of in the process of creating value in the market now,’ Barrineau said. ‘We’re looking at shorter duration, higher quality stuff as an anchor to the portfolio.'