There are still opportunities to be found in the fixed income landscape if one knows where to look, according to Fran Rodilosso, fixed income portfolio manager at Market Vectors ETFs.
“The first step for investors is to realise that many traditional fixed income investments are not likely to deliver the same types of returns we saw in 2012,” says Rodilosso (pictured). “Although one approach some investors might apply this year is to add leverage, doing so has often proven to be a perilous proposition. Instead, I believe the time may be right to consider emerging markets destinations that offer more attractive yields on top of currency and credit fundamentals that appear to me to be on much more solid footing than the US dollar, euro or yen investments.
“Interest rates in emerging markets countries are considerably higher than those in the developed world, despite emerging markets’ significantly lower debt-to-GDP ratios and fiscal deficits,” says Rodilosso. “The vast majority of emerging markets economies are growing faster than the US and I see an asset class that still can deliver incremental yield as well as diversify away from the US dollar.”
Rodilosso goes on to note that currency movements can and have played a large role in the returns on emerging markets local currency bond investments.
“But that is a positive part of the value proposition we see today – emerging markets currencies are not undergoing the same monetary experiment that could lead to a debasement of the world’s reserve currencies.
“The investable universe is continuing to grow in 2013, providing a greater ability to diversify” he says. “For example, our Market Vectors Emerging Markets Local Currency Bond ETF tracks a modified version of JP Morgan’s GBI-EM Index, which has recently seen a rise in the number of constituent nations. After adding Nigeria in late 2012, JP Morgan announced yesterday that Romania is now eligible for inclusion and Romanian debt will begin entering the index on 1 March.”
“However, it is still my belief that global asset managers remain under-allocated when it comes to local currency emerging markets debt,” he says. “Perhaps this is due to some investors’ tendencies to associate emerging markets in general with past boom/bust cycles. Add to that the fact that the relative strength of emerging markets may in itself be something that many investors are finding difficult to digest, let alone believe in enough to allocate significant capital, and that may very well be why we’re seeing value remaining in these markets.
Rodilosso has 20 years of experience trading and managing risk in fixed income investment strategies, including 17 years covering emerging markets.