As global share markets tumble and concern swirls about risk assets, one investment expert argues now is the time to invest in emerging market (EM) bonds.
Finisterre Capital is an EM specialist that manages funds in a variety of asset classes including sovereign debt, local currency debt, foreign exchange, corporate credit and special situations. Finisterre Capital was founded in London in 2002 and had US$3.3 billion of assets under management as of June 30, 2021.
Finisterre Capital’s CIO Damien Buchet said the outlook for EM bonds was strong against an uncertain backdrop.
“We live in a world where there are a number of key lingering uncertainties mostly pertaining to the permanence or not of this sudden energy price shock translating into higher inflation and the need for central banks to tighten liquidity and monetary policy,” Buchet said.
“The US Federal Reserve is hugely influential across emerging markets in terms of the pace of broader global liquidity and that’s clearly an issue”.
“What complicates the situation is China (Covid Zero strategy), which is continuing to disrupt global supply chains, and the continuing conflict in Ukraine.
“There are no clear and obvious circuit breakers this time around for many of these issues and that’s what creates anxiety.”
Buchet said the silver lining was that the uncertainties are not permanent.
“Food prices have risen, but they started rising early last year. That’s the time where EM central banks started to tighten policy so they are almost done with that cycle,” he said.
“That’s one good point for EM because risk premia has almost been restored.
“Bond yields are already significantly up since last year. We’ve already bitten the bullet in EM in many ways and the same thing holds for hard currency credits.”
Buchet said that what made him optimistic about EM debt is: “The prospects are now quite asymmetric with limited downside from here because fundamentally we’ve priced in a lot of the issues, and because we are more advanced in our cycle.
“The job of central banks in emerging markets is almost done when the Federal Reserve and ECB are barely starting theirs”.
“It will take some time for China to relax its zero covid policy and for global commodity prices to come down. However, we are already on the cusp seeing year-on-year inflation rates in both EMs and developed markets retreating from recent highs.
“So what remains on the agenda now is residual: how much the Fed needs to continue to tighten and whether the bulk of what they need to do is already priced or not”.
“We believe we are very advanced already in how many Fed hikes we need to price.
“As far as interest rates markets, the US curve already expects rates to tighten beyond neutral.
“Equity markets have not fully completed their necessary correction, but bond markets have done it already”.
“More than any other asset class, EM debt has largely repriced and is now in a rebuilding position”.
“(Investors) are already starting to capture very generous income streams the asset class offers, it’s definitely the right time to do that now.”
About Finisterre Capital
Founded in 2002, Finisterre Capital LLP is an emerging markets specialist dedicated to delivering risk- controlled, total return investment strategies to the institutional marketplace. The firm, which has US$3.3 billion of assets under management (as of June 30, 2021), manages emerging markets funds in a variety of asset classes, including sovereign debt, local currency debt, foreign exchange, and corporate credit.
Finisterre’s strategies are meant to deliver specific and adaptive risk/return solutions to a wide range of institutional and wealth management investors, emphasizing a conviction-based and dynamic approach to investment and risk management.
Note: This article is for general information purposes only and is not a recommendation.
