‘Rwanda pays us steadily as it recovers from war’
Trade tension between China and America and a currency crisis in Turkey are threatening to increase volatility in emerging markets, leaving some investors nervous. Emerging markets are less predictable than developed economies, creating opportunities for active managers who aren’t shy of a downturn.
One such manager, Claudia Calich, runs M&G’s £950m Emerging Markets Bond fund, which is included in the “Telegraph Income 10”, a list of our favourite high-yielding funds.
Ms Calich finds value in countries she expects to grow economically and whose credit ratings are lower and bond yields more attractive. She spoke to Telegraph Money about where she saw value and how she handled corruption. areas may offer huge diversification; for example, investing in Venezuela is a different story from investing in Colombia. There are stark differences in the quality of government or corporate bonds in countries that may look similar from the outside.
We assess global growth, commodities, inflation, monetary policy, the price of the American dollar – any key drivers that would affect emerging markets in either a positive or negative way. Then we look at countries themselves. If a state looks healthy and it doesn’t look like there will be a crisis we will invest, and we could consider corporate bonds as well as government.
“Top-down” drivers will always come out on top. In other words, we could be investing in a bond of the best company in the world, but if there is a wider crisis or period of instability in that country, the company will inevitably suffer.
Claudia Calich of M&G tells Harry Brennan about investing in the world’s more volatile economies
Ms Calich has more than 20 years of experience of investing in emerging markets. She previously worked at Investec before Rarely. We will sometimes do it if we think that the market is mispricing the eventuality of a scenario that could disturb things.
There are a number of ways we can do this: we can simply choose not to invest there, short sell [bet against] the currency, or enter into a credit default swap [a form of insurance on a bond] that will pay out if things go downhill.
During the Peruvian general election in 2016 I thought the market was underestimating the probability of a more populist candidate making it through to the second round. I bought protection through credit default swaps and shorted the currency. The bet didn’t come off in that case and I quickly closed my position. If we have concerns or think the risks are not priced into the market or the bonds, we can sit down with the issuers and put questions to them. If they are being evasive or not giving us the full picture, we can’t understand what is going on in that country or in that company so we won’t invest.
Take Mozambique – we didn’t invest there because we had concerns about transparency. It turned out we were right when it was discovered that the country’s debt levels were a lot worse than the government was letting on.
At the moment we are investing in smaller economies such as Ivory Coast, Angola, Senegal, Nigeria, Uruguay and Rwanda. For the most part they are benefiting from recovering growth where the currency has previously