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Following months of scandal, a less frenetic backdrop and attractive valuations in Brazil’s fixed income market, led the fund to increase its allocation in Brazilian debt to 11.46% (as at 31 July). This was up from 7.87% at the end of June and compares with a Brazil weighting of 6.61% from the Fund’s comparative index, JPM CEMBI Broad Diversified1.
The fund also maintained an overweight in Peru, at 6.9% of the fund versus 3.22% of the index, given the country is one of the world’s largest exporters of copper and should benefit from the recent rise in global copper prices.
McDonagh comments “In the near term we expect the benign environment for emerging market corporates to continue, helped by robust economic growth and recovering corporate fundamentals; range-bound US treasuries and strong technicals – low net issuance and high inflows – are also supportive.”
All regions contributed positively to the fund’s performance in July, with Latin America and Eastern Europe being the best performers, according to McDonagh, who is head of EM fixed income at Insight, a BNY Mellon company.
Increased attraction
He says US investors, faced with low bond yields in their local markets, have been increasingly attracted to emerging market corporates but cautions that global interest-rate volatility could increase before some important central bank meetings in September.
“Both the European Central Bank and the Federal Reserve could signal future policy normalisation, so we will be looking to proactively trim our exposure where necessary and tactically manage currency risks. We continue to favour Brazil, Mexico and Peru in Latin America; Kazakhstan, Turkey and Ukraine in Central and Eastern Europe; and Indonesia in Asia.”
While the focus of investors has undeniably turned to the prospect of central banks collectively tightening monetary policy, McDonagh believes this process will likely be gradual in nature and that a repeat of 2013’s ‘taper tantrum’ sell-off is unlikely.
“We believe conditions are superior to those that caused the 2013 taper tantrum sell off, with lower current account deficits and higher real yields in the most vulnerable markets, and think emerging market corporates can continue to generate positive performance”.
The move towards Latin America continues from the end of the second quarter, when the fund’s exposure to Asia was reduced. Specifically, McDonagh reduced South Korea and Thailand, moving the fund further underweight on both countries versus the index.
In terms of credit quality, the fund has 47.8% invested in high yield corporate bonds, rated BB and B; the remainder is invested in investment grade and cash. Cash holdings have been reduced by close to 2% since the end of Q2, following the increased allocation to Latin America.
[1] Unless otherwise noted, all data as at 31 July, BNY Mellon.
Past performance is not a guide to future performance. The value of investments can fall. Investors may not get back the amount invested. For Professional Clients only. This is a financial promotion and is not investment advice. Portfolio holdings are subject to change, for information only and are not investment recommendations. Any views and opinions are those of the investment manager, unless otherwise noted. For further information visit the BNY Mellon Investment Management website. INV00947 Exp 29 Nov 2017.