Emerging market bonds in local currencies - outlook

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According to Yasmine Ravaï, portfolio manager of Eurizon Fund - SLJ Local Emerging Market Debt, which reached almost 1,3 billions euros in the first week of July, the Chinese economy is unlikely to recover strongly in the second half of the year. "Beijing's policy is currently focused on reducing debt and streamlining the shadow banking system. It is therefore inevitable that growth will slow. The problem is exacerbated by the ongoing trade conflict with the US," she says. Against this backdrop, she expects that the Chinese economy will develop less in the form of a "V" and more in the form of an "L" in the coming months.

On the positive side for China and other emerging markets is the US Federal Reserve, which has been on a more moderate course since January, which tends to weaken the dollar. But this too has a downside. The Federal Reserve's willingness to relax its monetary policy again if necessary is due to the slowing momentum of the US and global economy, which in turn is negative for the emerging markets.

"The bottom line is that the emerging market environment is challenging," says the portfolio manager, who invests primarily in emerging market local currency bonds. Against this backdrop, it is a dangerous strategy for many asset managers to be guided almost exclusively by the yield level when selecting debt instruments for their funds. "In the past, this has often caused trauma for many investors who have not been able to get out of these positions in the event of a crisis," she says.

She considers a two-part strategy to be more suitable. "As a first step, we look at a number of global factors top-down. Most important is the Fed's monetary policy and its impact on the dollar. In our experience, about 75 percent of the performance comes from the currency," explains the portfolio manager. In addition, there is the bottom-up analysis of local issues and individual issuers.

Accordingly, Eurizon Fund - SLJ Local Emerging Market Debt is currently overweight in Polish bonds, for example. "The zloty is stable and securities from Poland have benefited from their status as safe havens," explains Ravaï. On the other hand, the sub-fund is underweight in South African and Brazilian bonds. Turkish bonds are very attractive because of their exceptionally high yields as long as the currency does not move. However, the market has almost completely collapsed, which is why one has to act very cautiously. "That's why we only positioned ourselves at the short end," concludes the portfolio manager.

Eurizon Fund - SLJ Local Emerging Market Debt Z (LU1529956952), calculated in euros as of 30 June 2019, has performed 9.24 percent since the beginning of the year (versus 9.14 % as the benchmark performance).