Emerging markets are a must in the hunt for yield from corporates
Source: Fisch Asset Management , Author: Posted by BI-ME staff
Posted: Sun September 10, 2017 8:54 pm

ZURICH. -- Fisch Asset Management 02.08.2017 -- Technology and globalisation are powerful levellers, enabling investors to purchase bonds from nearly every country on earth. “This variety is a blessing, but it’s also a huge challenge. Securities issued outside Europe and the US require particularly intensive research in order to evaluate them properly and be able to draw benefit from them. A successful hunt for yield in these markets is demanding; expertise and experience are what count,” says Meno Stroemer, Head of Corporate Bonds at Fisch Asset Management in Zurich.

And in the hunt for yield, emerging markets are absolutely essential. “Emerging market bonds offer greater returns, despite relatively better fundamentals. For example, companies in emerging markets usually have lower debt levels than their peers in developed nations. On top of that, economic growth rates are better in many emerging countries.

Thus, investors in the BBB rating segment, which corresponds to the lower investment-grade category, currently receive a 0.6% higher risk premium for emerging-market corporates than for US corporate bonds. As for slightly riskier BB-rated bonds, the difference is more than 1%. Therefore, investors should pay close attention to emerging markets – and not lump all markets together,” says Stroemer.
 
The maxim “bright lights cast long shadows” is just as applicable in emerging markets as elsewhere. “We’re seeing very expensive valuations in Russia,” explains the bond expert. “In light of potential US sanctions, compensation is too low for the risk incurred. In China, too, we think there is too little transparency in the market for high-yield corporate bonds and specifically for new issues; consequently, we are proceeding with extreme care here.

"On the other hand, the high-yield segment in Latin America looks interesting, with some decidedly attractive securities. The African continent poses the biggest challenge: in most cases, markets are not yet up to emerging market standards. South Africa is an exception: there we see a number of investment opportunities.”

Generally speaking, Stroemer is convinced that a bond fund lives or dies by its diversification: “You need to know the companies in your portfolio really well in order to find out how the risks are spread. A glance at the rating is not nearly enough. What’s more, simultaneously layering in emerging-market and high-yield bonds can lead not only to higher yields, but also to significantly greater diversification.

"Growth rates in the high-yield and emerging-market corporates segments (hard currencies) ensure that both markets are large enough and sufficiently liquid. Launched three years ago, our FISCH Bond Global Corporates Fund looks to these segments in particular in order to exploit as many opportunities as possible. With an average rating of BBB+, the fund nevertheless remains an investment-grade product that is suitable for a broad investor base.”

The FISCH Bond EM Corporates Opportunistic Fund was developed for investors who are convinced of the advantages of exposure to emerging markets and want a portfolio solely comprising emerging-market bonds. It already boasts a successful track record in the 12 months since its launch.

Photo captions: (1) Main photo: Meno Stroemer, Head of Corporate Bonds at Fisch Asset Management in Zurich  (photo credit: FAM)
                            (2) Inset photo: For illustrative purposes only (File photo)

 

 

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