‘Brazil could be a big winner under Trump’
Donald Trump’s impending presidency in America has created fears that emerging markets could be hit. The concern is that Mr Trump’s protectionist measures could harm trade between the United States and other nations.
Government and corporate bonds issued in developing countries have become cheaper, causing their yields to rise and making them more attractive to income-seekers.
M&G Emerging Markets Bond is one fund investing in the debt of these less developed nations.
The fund can invest in bonds issued by governments and companies, and in foreign currency and various other complicated strategies that profit when the market falls. It currently yields 4.8pc.
Telegraph Money spoke to manager Claudia Calich about the countries that are poised to rise and her profitable Ukraine holiday in the recent crisis.
What is your process?
We start by looking at emerging and developed market trends, at growth, politics, central bank policies, commodity prices and inflation. This dictates whether the fund will be riskier or more defensive.
The split between bonds priced in dollars and bonds priced in local currencies is decided at the beginning too.
Then we filter for individual countries based on valuations, economic trends, political movements and debt levels.
If we think the country is not going to implode then we can also invest in corporate bonds, issued by companies.
Do you see bigger opportunities in government or corporate bonds?
I have slowly reduced the corporate bond exposure from 60pc three years ago to 30pc now.
We find areas of the corporate market, such as high-quality Chinese companies, expensive.
Some areas have also become difficult to analyse, such as in Brazil, where a number of companies have been involved in scandals.
How would the return of inflation and rising interest rates affect emerging markets?
One effect that’s more positive is the rebound in commodity prices, which is good for many African nations and some in Latin America.
The negative comes from interest rates. US government bonds are pricing in higher inflation, in expectation of a big fiscal stimulus from Mr Trump.
This is negative for countries or companies with higher dollar borrowing, as they will pay more to refinance.
In 2016, Brazil was the best emerging market bond performer and Mexico the worst. What does 2017 hold?
When the benefits of globalisation are questioned, Brazil could be a big winner as it’s a relatively closed economy, although much of that advantage is priced in already.
Mexico is the opposite to Brazil – it’s not easy to change the structure of an open, globally dependent economy.
However, the Mexican peso is cheap, and the country is regaining market share from China.
We bought the Mexican peso after the election, despite the challenges. We had none beforehand, as the market was too optimistic Mr Trump would lose. I was more cautious.
Are emerging market bonds risky following the election of a new US president, asks James Connington
What was your best and worst investment?
The biggest win was a few years ago during the tensions between Ukraine and Russia. Ukraine’s currency was collapsing, and debt levels were very high.
I went to Kiev on holiday and took a day of meetings. The bonds looked very cheap, so I bought government bonds and a corporate bond. They more than doubled in value in six months, due to a debt restructure. It’s probably the best trade of my career.
The worst was with another fund. I invested in Ecuadorian government bonds in 2007 and a new administration decided the issues were illegitimate, effectively defaulting.
I learnt that it’s important to distinguish between ability and willingness to pay in emergingmarkets.
Do you have your own money in the fund?