EM debt: Our 2020 view - THE BLUEBAY EMERGING MARKETS INVESTMENT TEAM - BlueBay Asset Management
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EM debt: Our 2020 view THE BLUEBAY EMERGING MARKETS INVESTMENT TEAM
EM DEBT: OUR 2020 VIEW
After a positive year of returns in 2019, what are
your expectations for the asset class going into
2020?
POLINA KURDYAVKO, HEAD OF EMERGING MARKETS
2019 proved to be a positive year 2. Maturing
EM credit cycle is creating
for emerging market (EM) assets, increased price dislocations in liquid In 2020, we
stressed credits. expect China to
particularly those denominated in
As the credit cycle matures, we expect more
USD. Returns were robust despite poor provide stimulus
stress in idiosyncratic credit stories given the
global growth and a number of macro tepid growth outlook combined with a gradual
to the domestic
risks. path towards global interest rate normalisation. economy
While default rates are likely to increase towards both through
Coming into 2020, the global liquidity environment the historical average (3.5% for corporate EM infrastructure
looks as though it will be supportive for the asset high-yield credits), we expect to see more price spending and
class, encouraging investors to search for yield in dislocation in liquid stressed credits, especially
loose monetary
EM. However, EM growth is likely to remain modest, in some sovereigns.
policy
accompanied by a slow rise in default rates from
the currently low level. Gains therefore could be 3. Domestic
stimulus provides liquidity
muted at the index level but investors would be support to corporate credit.
wise to seek out sources of return, both from the This theme has been playing out in Western
long and short side. Europe for several years. In 2020, we expect
China to provide stimulus to the domestic
We see three key themes driving the performance economy both through infrastructure spending
of EM risk assets in 2020: and loose monetary policy. Sectors like Chinese
real estate, in our view, will be one of the key
1. Shift
from growth to stability presents beneficiaries of that support.
potential carry trade opportunities.
Historically, investors were focused on growth
as a key driver of EM performance. Yet some EM
countries have moved away from a ‘boom/bust’
growth profile and towards macroeconomic
stability, which provides positive risk-adjusted
carry opportunities.
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EM DEBT: OUR 2020 VIEW
Which risk factors do you think
will prove most material in 2020?
RUSSEL MATTHEWS, SENIOR PORTFOLIO MANAGER
The three risk factors that we think hard currency spreads to incorporate a higher
will be most influential are the Fed’s liquidity premium, which could impact our views A more hawkish
in some hard currency credits. If this scenario stance from
stance, global liquidity and geopolitics.
were to materialise, we could express a negative
the US Federal
A more hawkish stance from the US Federal view through taking a short exposure in EM credit,
Reserve is likely
Reserve would challenge our view on some as well as using CDS to reduce our exposure to
defensive high-carry positions that we have in the market beta or express a negative beta view. to challenge our
portfolio. If this scenario were to materialise, we view on some
could protect the portfolio through taking a short On geopolitics, material instability can never be defensive high-
position in EM FX. ruled out, especially in the Middle East. If tensions carry positions
escalate further in the region, which is still a tail that we have in
On liquidity, could we see the environment risk, there could be profound implications for the
the portfolio
become more challenging for EM credit given Middle East, oil prices and potentially sentiment
the global monetary and geopolitical backdrop. A around the US economy. Russia could emerge as a
more difficult liquidity environment might reprice potential winner from such a situation.
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EM DEBT: OUR 2020 VIEW
Argentina – is the next stop debt restructuring?
GARY SEDGEWICK, PORTFOLIO MANAGER
GRAHAM STOCK, EM SENIOR SOVEREIGN STRATEGIST
Argentina’s transformational election and multilateral creditors. A fiscal adjustment will,
in 2015 promised the electorate, and in our view, be inevitable, whether to comply with In 2019, voters
a renegotiated IMF programme or to adapt to reversed the
investors, a new market-friendly vision
the absence of alternative financing sources, but
for the country. direction of travel
the Fernandez government will hope to backload
completely,
In 2019, voters reversed the direction of travel any austerity push and generate a short-term
completely, effectively bringing back the old growth boost in the meantime. As a result, we effectively bringing
government and expunging the technocratic expect maturity extensions and near-term coupon back the old
policymaking of the Macri administration. The holidays, but do not see a need for nominal government
August primaries foreshadowing the October haircuts. and expunging
election result prompted a sharp drop in bond the technocratic
prices, which should serve as a cautionary tale for Additionally, in our view holders of front-end bonds
policymaking
investors looking to invest not only in Argentina but are in a good position to resist being subordinated
in Latin America in general from the perspective of to debt falling due to the IMF in 2022 and 2023,
of the Macri
shifting political landscapes. and therefore to remain at the front of the queue. administration
That said, great volatility can bring great The restructuring process is yet to get underway
opportunity and Argentina is no different in but with the above in mind, we favour short-dated
this regard. The final recovery prices of the bonds and tactically deploy downside protection via
bonds are likely to be determined by three-way medium-term CDS instruments (where possible).
discussions between the government, the IMF and Our recovery value analysis shows that the likely
bondholders. recovery in the short end should be in a 60-70
range with current bond prices in the low 50s. This
In our view, cashflow relief over the next few provides potential opportunity on the upside.
years should be the government’s priority even
while it seeks to share the burden of adjustment
between the domestic population, bondholders
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EM DEBT: OUR 2020 VIEW
What is the significance of the PrivatBank
case to the Zelensky presidency?
TIMOTHY ASH, EM SENIOR SOVEREIGN STRATEGIST
Ukraine’s President Zelensky was and has pleaded for support from the presidency
elected on a ticket to clean up and international financial institutions against the PrivatBank is
oligarch. Zelensky has promised a level playing field important as it is
corruption, which opinion polls
in the fight against corruption but a failure to deal
suggest is the top concern for the the largest bank
fairly with Kolomoisky on the PrivatBank issue will
electorate and business. The travails in the country and
leave him vulnerable to claims of applying selective
of Ukraine therein have been revealed justice, blowing a hole in his anti-corruption subject to a legal
in the Trump impeachment hearings. agenda. The issue is also key to ensuring IMF tussle between
support for Ukraine and is the canary in the coal the Ukrainian
PrivatBank is important as it is the largest bank in mine for investors as to whether Zelensky is a real authorities and
the country and subject to a legal tussle between reformer. Igor Kolomoisky,
the Ukrainian authorities and Igor Kolomoisky, a
a highly
highly controversial oligarch who backed Zelensky’s US support for Ukraine in the period since
election campaign. Kolomoisky is accused of EuroMaydan has been critical in holding off
controversial
fraud in the failure of the bank which resulted in pressure in the East from Russia. The Trump oligarch who
its eventual nationalisation in 2016 and losses of impeachment hearings have underlined that backed Zelensky’s
USD5.5bn (6% of GDP at the time) suffered as a this support is to some extent dependent on election campaign
result by the state. Ukraine showing a willingness to fight corruption.
All this has made a satisfactory resolution of the
The Central Bank now accuses Kolomoisky of PrivatBank mission critical.
running a campaign of terror against its employees
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EM DEBT: OUR 2020 VIEW
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