Russian corporate and sovereign debt has been the best performing of all emerging markets this year, British fund manager Schroders’ head of the Emerging Market Debt relative return said.
James Barrineau, who also manages several EMD funds at the firm, said Russia had a downturn in growth as oil prices were halved and the markets started panicking, Citywire reported.
Barrineau said this difficulty was compounded by the Russian currency depreciating sharply at the end of 2014, however, he doesn’t see these developments in a wholly negative light.
He added that Russia lost $120 billion in foreign exchange reserves during the lowest point in the fall of the oil prices, but now the country is increasing reserves as the ruble becomes more competitive.
He said a stabilizing economy is only one of the reasons Russian debt is doing so well. He said western sanctions–which other managers expect to continue for the foreseeable future–forced Russia to limit new debt issuance. He said the country sold its reserves to pay off debt amortizations and is deleveraging now.
“The total amount of debt in Russia, both corporate and sovereign, is falling because it doesn’t have access to the market,” Barrineau said. “The market has recognized that and Russia is the best performing debt market today.”
Ruble Revival
Barrineau said it is not only Russian debt which is improving but he is also looking at the currency, which is proving attractive despite significant headwinds. “The Russian ruble along with the Mexican peso is the only two currencies that could be overweight against the benchmark,” he said.
Overall, Barrineau said, he is planning to gradually increase currency exposure, because, in his opinion, the market has come far enough in terms of pricing-in the Fed’s interest rate hike. “With currencies being down 40% in two years, yields in local markets are at their five-year high. The dollar yields are at 4-5%, while the local yields are even more attractive at 7-9%.”
Global Search for Yield
Barrineau remains positive on emerging markets as a whole, saying growth is still 2% faster than the developed world. He said if emerging markets yields eventually crash, developed markets yields will crash as well.
“Dollar sovereign emerging market debt has returned 3% this year and outperformed the S&P in the US,” said Barrineau. “Its greatest advantage is the high level of yield.”
He said the global search for yield is so strong that people continue to buy emerging market debt, despite its bad fundamentals, such as liquidity flowing out, slowing growth and falling currencies.
“In this era of the global QE and developed market yields offering nothing there are many pension funds that have to reach 5-6% return necessity in order to meet their liabilities,” said Barrineau. “You won’t get these numbers anywhere else except in the emerging markets.”
