Kames Capital: EMD – What’s hot and what’s not in 2018

Emerging market debt may struggle to replicate last year’s returns in 2018 with yields already compressed, but there remain pockets of value for those looking for yield, according to Kames Capital’s emerging market debt manager Theo Holland.
Despite doubts over the outlook for the sector, emerging market debt outperformed most other fixed income asset classes globally in 2017, with parts of the market achieving double-digit returns and surprising naysayers who feared it was too expensive.
Holland, co-manager of the $104m Kames Emerging Market Bond Opportunities Fund*, concedes returns may not be quite as strong this year, but says there remain pockets of value for investors to focus on.
“Last year, returns in emerging market debt were higher than many in the market were expecting, with the main US dollar denominated sovereign index returning 10.3%, and the principal corporate equivalent delivering 8%,” he says.
“Is the outlook for returns in 2018 as rosy? We think that full year returns this year are likely to be a little lower than in 2017, coming in closer to coupon type levels. But there are a number of areas for investors to focus on that could still generate healthy returns.”
Below, Holland who manages the Kames Emerging Market Bond Opportunities fund alongside John McNeill, head of rates within the fixed income team, identifies the places to focus on this year, and those regions to be cautious on.
What’s Hot:
Nigeria, Ethiopia and Senegal within Africa:
“In what remains, ultimately, a supportive global backdrop, we think African credit can deliver another strong year in terms of returns. Versus other regions, supply is likely to be on the low side, while the value uptick is decent. We like Nigerian corporates and financials, as well as Ethiopia and Senegal on the sovereign side.”
Sri Lanka and Mongolia within Asia:
“Across Asia there are a few distinct opportunities. We like high yield names such Sri Lanka and Mongolia, and selective HY corporates in Indonesia and India.”
Turkey within Europe:
“The region as a whole is expensive, but currently Turkey is looking a little more reasonable than its peers, after a small sell-off in the second half of last year.”
The Middle East:
“We think that the danger posed by the region’s politics, and continued heavy supply, is overdone. Ultimately, this a region that highly prizes both stability and market access, and we expect both to continue. Within the Middle East we particularly like Bahrain on the sovereign side, blue-chip UAE corps, and Kurdish oil names.”
What’s Not:
Latin America:
“After Africa, Latin America was the top performing region last year, but here we are a bit more guarded in 2018. Brazil’s reforms are stumbling; it, like Mexico, faces a Presidential election this year, with the possibility of a distinctly non-centrist candidate being elected. In the higher beta space, Argentina and Ecuador have done very well, and still have plenty of supply for the market to take down.”
Russia within Europe:
“Alongside Turkey, the other major market in Europe is Russia but this is currently expensive, pricing in a return to investment grade.”