By Jonas Wäingelin, NordicInvestor
As the all-consuming coronavirus crisis continues to dominate market sentiment around the world, Nordic Investor interviewed Alejandro Arevalo, Fund Manager of Jupiter’s Global Emerging Markets Debt strategies, to learn more about the sectors and countries he seeks out or avoids.
NI: How has emerging market debt been holding up in the crisis environment?
AA: Following panic selling in March, flows returned to the EMD asset class in April, with EM bonds rebounding strongly as investor confidence in emerging markets has grown again. Clearly, the more positive sentiment towards the asset class was helped by the partial recovery in oil prices, discussions of lockdown reversals in several countries globally, and supportive government and central bank measures worldwide.
The impact of the virus and oil price developments will be different for each country and their economy. We expect to see countries like Mexico hit the hardest, as President Lopez Obrador still doesn’t seem to realise the severity of the virus and government assistance is non-existent for the private sector. Several African nations are also likely to suffer greatly due to limited resources, high levels of poverty and high concentration of people. Additionally, central banks in countries such as Turkey and South Africa have limited ammunition to inject liquidity into their economies. In contrast, other EM countries are likely to fare much better. Asia, for example, has had the benefit of being the ‘first in and first out’ of the crisis.
In any case, though, we’ll be living in a world with ballooning fiscal deficits as governments step in to support their economies, and pre-existing vulnerabilities will come to light – we’ve already started to see this in some EM countries such as Zambia. However, more positively, many EM countries have deeper local markets than they did in the last crisis, and they’ve been actively using them to fund themselves and to avoid the mismatch between assets and liabilities.
NI: What are the most interesting opportunities you have seen after the selloff?
AA: We have been taking advantage of attractive opportunities that have arisen, seeking out EM corporates with the strongest fundamentals, with bonds that are trading at low valuations. As there is significant uncertainty over the nature of the recovery, we believe that high-quality businesses that operate in non-cyclical sectors are the best area to be invested in.
While the recent, indiscriminate selloff has created an attractive entry point, we believe that, especially in the current situation, it takes comprehensive fundamental research to identify the best quality credits. To this end, we have been applying three key strategies to our funds: First, we have been trying to avoid major pitfalls by going through the portfolio with a fine-tooth comb to identify what we believed were the most vulnerable names. Second, we have maintained our disciplined approach and have not panicked alongside markets, holding onto many names that we believe should not only survive the crisis but could come out of it stronger. Finally, while it’s impossible to know whether we’ve reached the bottom until we’ve passed it, it’s still possible for us to assess whether something seems cheap at its current level. We have therefore scaled into already cheap names, and we are prepared to buy more if they should fall further.
With heightened uncertainty, we believe a flexible, active approach is vital, allowing us to respond to new information as it becomes available, and to take advantage of attractive opportunities as they arise. As always, we remain focused on both security and country differentiation, and we believe this differentiation is particularly important given the current market conditions.
NI: How have you positioned your funds in view of the threat of more downgrades and higher defaults?
AA: Rating agencies have indeed been busy over the past few weeks, downgrading many sovereigns and companies. It seems they don’t want to be criticised for being behind the curve like they were in 2009, so they’re now moving to the other extreme. We will continue to monitor this closely. When calculating the average rating for funds, we continue to take a more conservative approach, focusing on lower ratings if companies have split ratings.
We have continued to increase our investment grade allocation via both primary and secondary markets to take advantage of the premium in the new issue pipeline and mispriced credits. As a result, our cash position has come down from double digits to our average of 5%. Our key focus has been on solid IG credits, where even in a protracted recovery we would not expect rating agency downgrades from investment grade to high yield, which would trigger forced selling and spread widening. As a result, as per end of April, our funds’ average credit rating has now increased to BBB-, with a current yield of approximately 7%.
NI: How are you positioned on a country level?
AA: We have continued to increase our allocation to Asia as the region was hit first by the crisis and should therefore recover first too. We see particular value in Chinese credits across a range of sectors, such as real estate, utilities, and financials.
While our exposure to Latin America contributed positively to our funds’ relative performance in April, we decided to reduce our exposure to the region during the month, primarily by cutting our overweight positions in Brazilian and Mexican credits following weak responses from their governments to the coronavirus pandemic, and political issues in Brazil. Where we do have exposure to Brazil, it is through its exporters, which benefit from currency depreciation and are in strong cash positions. We continue to favour the protein sector, in particular, and we have taken advantage of weakness in Brazil by adding to some of our positions in protein exporters.
We have also reduced our exposure to Africa, primarily due to weak oil and commodity prices, and given its demographics, which we believe may make it more vulnerable to the coronavirus pandemic.
We have fully exited sovereign bonds in countries where we believe governments have limited resource to fight the virus. In some cases, we still have exposure to corporates in those countries, where we have identified solid companies that we believe will be able to navigate the crisis or even flourish. Some of these companies with strong fundamentals are being penalised for operating in weak countries, so the premium to hold some of these names has become extremely attractive.