Michael Conelius, emerging market debt portfolio manager at T Rowe Price, has bought into debt of selected domestic-oriented Russian companies as expectations of further sanctions against the country have 'greatly diminished'.
While the manager previously reduced exposure to Russian sovereign debt, Conelius has re-entered the country’s credit markets as tensions ease with neighbour Ukraine.
More broadly, despite emerging market bonds rallying strongly in 2014, Conelius says the asset class remains attractive relative to other fixed income alternatives.
‘Emerging debt has been challenged,’ Conelius says. ‘We went through the global financial crisis, tapering, election concerns and geopolitical instability. The asset class has proven itself to be fairly flexible. It is still where a significant source of the growth comes from, and investors remain underweight.’
While Conelius acknowledges valuations are not as attractive as they were six months ago, he expects coupon income to drive further returns for the rest of the year.
Below, Conelius discusses the near-term prospects for a number of EMD outposts:
‘I think we have seen the worst and President Putin will play for a longer term game. The market has recognised the fact Russia came into this environment very strong comparatively. We have seen almost a full retracement of yields in Russia, and the currency is more stable. We have re-entered the market in a small way, because one effect of all this will be lower growth in Russia and maybe more inward orientation of investment that could drive down local interest rates.
‘What always stood in the way of Ukraine’s potential is the Ukrainian government. It is the bread basket of Eastern Europe. It could be the bread basket of Europe, with some of the most fertile fields in the world. It could be an export powerhouse in agriculture. If you brought in just a degree of western influence – in the rule of law and governance – the potential is enormous.’
‘India could be the next Mexico in terms of policies and growth. We could see a whole second wave of companies coming out of India. And Mexico is still a tremendous opportunity on the energy reform front.
‘Brazil is the big wild card. It has been a bad news is good news environment. As President Rousseff struggles in the polls, the market has been very optimistic she will lose and we will have better policies. I think that might be optimistic, but if that were to happen it would be a tremendous tailwind for emerging debt into 2015.’