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Dr. Ricardo Adrogué is head of the Emerging Markets Debt Group for Babson Capital Management. He is also lead portfolio manager of Babson’s Emerging Markets Local Debt Strategy and co-portfolio manager of the firm’s Emerging Markets Sovereign Hard Currency Debt, Blended Total Return Debt Strategy and Short Duration Bond Strategies. Here are his current insights into emerging market investments.
Last November, you made a prescient call on emerging markets local debt. What was your thinking in making that forecast?
Our global team of analysts looked carefully at trade volumes, current account balances and hard currency (dollars and euros) valuations for 17 countries. We found that emerging markets were in relatively good shape and their financing needs had come down, making sovereign debt issued in local currencies an attractive proposition. That investment thesis proved to be correct.
Going forward, why do you remain positive about the emerging markets?
Global trade activity is supportive of emerging markets. Although trade growth in 2015 and early 2016 has been negative in nominal U.S. dollar terms – due largely to low commodity prices – trade volumes are actually up, led by Eastern Europe and Latin America. We believe this improvement is a sign that the global economy is in decent shape and should remain supportive of emerging markets in the next 12 months.
What about the outlook for sovereign debt?
Emerging markets sovereign debt performance has been poor since 2013 due to weaker Chinese growth, lower commodity prices and increasing levels of public and private sector debt. In recent months, this downward trend has reversed, and we now believe emerging markets – particularly local currency debt – present attractive value opportunities over the next 12 months.
What are the factors behind your forecast?
There are several mutually reinforcing reasons for this turnaround: global growth is positive, inflation is low, central banks are maintaining accommodative monetary policies, and spreads appear to be overstating sovereign default risks.
Will emerging markets need more external financing?
The need for external funding has decreased markedly in the past year and we expect it will continue to fall for the next 12 months. Many of the emerging markets are now able to manage their outflows without external borrowing or resorting to currency depreciation. That creates a more stable environment for institutional investors, as there is less of an incentive to move their funds.
How will corporate investment be affected?
When currencies become cheaper, foreign companies have an opportunity to acquire real assets and increase their capacity at a lower cost. That investment can have a positive effect on the local economy, creating new jobs, increasing tax flows and raising income levels.
Which fixed-income asset classes are most attractive today?
We believe there are opportunities across the full spectrum of emerging markets debt. For investors seeking to maximize returns and willing to accept a higher level of volatility, emerging markets local debt may be the most attractive option. Hard currency sovereign bonds also look attractive from our perspective and may have the added benefit of lower volatility. We also see opportunities in emerging market corporate bonds, particularly among investment grade rated names and quasi-sovereigns, or state-owned companies, which benefit from the implicit or explicit support of the sovereign. While we don’t expect that all of the market volatility is behind us, we are increasingly confident about the backdrop for emerging markets debt.
Babson Capital Management LLC is one of the world’s leading asset management firms, with over $231 billion in assets under management as of March 31, 2016. Through proprietary research, analysis and a focus on investment fundamentals, the firm and its global affiliates develop products and strategies that leverage its broad expertise in global fixed income, structured products, middle market finance, commercial real estate, alternatives and equities. A member of the MassMutual Financial Group, Babson maintains a strong global footprint with operations on four continents and clients in 25 countries.
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