The ‘Fragile Five’ countries offer interesting opportunities as they are delivering on reforms and benefitting from the oil price drop.
This is according to the Citywire + rated manager Michael J. Conelius, who manages six emerging market debt funds at T Rowe Price.
In his T Rowe Price Emerging Markets Bond fund, Conelius has increased his exposure to the Fragile Five by two percentage points over the past quarter. He now has a 33.2% overweight position in this area.
‘We strengthened our allocation especially in the countries that were facing election uncertainty. The currency depreciation in some of them helped fixing their current account balance,’ he said.
According to Conelius, these countries have benefited from a series of reforms and the oil price fall. ‘In many cases, the fragility came from the fact that they are oil importers.’
Finding favour in the fragile
Elsewhere among developing countries, Conelius has a preference for the local and corporate bond market in Brazil, peso-denominated Mexican bonds and Turkish external and corporate bonds.
‘In Brazil, we also upped our exposure in the dollar-denominated space before the elections, as the market got scared about a possible Dilma win,’ he said.
He also added to Brazilian energy multinational Petrobras, which underperformed recently given the oil price drop and a much-publicised corruption scandal within the company.
‘We upped our Petrobras weighting too soon, but we think it won’t incur into any technical default. Also, the corruption scandal is now solved,’ he said.
Elsewhere, Conelius favours the Indonesian local market as he said it has benefitted from some political reforms as well as the oil price fall. Meanwhile, in India, he owns state-owned enterprises and some corporates, as he said they will deliver strong numbers on a long term.
In Turkey, Conelius likes the banking system but said corporates are now trading very tight to the sovereign space and valuations have gone up significantly.
On the underweight side, the Citywire + rated manager has started to slowly add back to Russia as he said valuations are very attractive and he’s confident in the payment capacities of the country.
‘I think tensions with Ukraine won’t re-escalate and sanctions will remain where they are now,' he said.
Despite avoiding Russian banks, he has a position in Sberbank as he thinks the firm can be seen as the safest bank in the country.
Fed will delay rates’ hike
Conelius is less concerned about a possible Fed’s rise of interest rates than he was six months ago. He thinks that, given the weak global economy and the oil price fall, the central bank will delay the hike until September 2015.
‘If it happens, it will be slow and gradual. But I think it will start later than expected. Generally speaking, emerging markets are more meaningfully challenged by what’s happening with the oil price than by what the Fed will do with rates,’ he said.
Over the past three years, the T. Rowe Price Emerging Markets Bond fund returned 14.61%. This is while the JP Morgan EMBI Global index rose 16.85%.