Some of the emerging markets, such as Argentina and South Korea, are the best re-rating stories within the EM spectrum, Chia-Liang Lian, head of emerging markets debt at Western Asset Management has said.
Lian told Citywire Asia that Argentina defaulted on its sovereign debt in 2001. During the past 15 years, the country was locked out of the global debt markets. Only in last April did Argentina make a comeback to the international scene with a $16.5 billion bond sale.
‘Mauricio Macri, the current president of Argentina, spared no time after he was formally installed in late 2015,’ said Lian. ‘He immediately implemented much-needed market reforms.
‘Importantly, this is an administration that focuses on structural reforms over the secular horizon, and is prepared to bear the brunt of short-term macro-economic adjustments. Our optimism on Argentina underscores Western Asset’s philosophy of long term value discipline.
‘Argentina’s turnaround presents a classic EM re-rating story and an opportunity for EM investors during a period scarred by severe shake-ups in other EM countries, as a result of geopolitical risks and political scandals.’
Furthermore, Lian said that other successful stories, notably South Korea, provide a blueprint for frontier EM nations regarding economic maturation.
‘South Korea’s sovereign rating was beaten down to a record low of B+ at the height of Asian financial crisis back in 1998. Today, it’s a solid double A sovereign,’ the head of EM debt said.
Brazil, India and Indonesia
Besides Argentina and South Korea, Lian's team has also participated in investing in a range of local currency government bonds and is overweight currencies in the countries that they like.
Lian has progressively increased his exposure to Brazilian bonds since March 2016.
'While the economy is by no means out of the woods yet, we are encouraged by market-oriented policies put in place by the administration that is led by president Michel Temer.
'Critically, these efforts mark the departure of some of the legacy issues that plagued the country, including the economic condition and the political environment.
‘With the benefit of hindsight, the change of government roughly a year ago has indeed been a “game changer” from an investment perspective. Despite the impressive rally over the past year, we think relative valuations still remain attractive.’
Additionally, Lian said that the Central Bank of Brazil’s policy bias for further monetary easing will have a salutary effect on capital appreciation of local currency bonds.
In Asia, Lian is upbeat about India and Indonesia. ‘Both countries have a huge domestic demand, which drives economic growth.
‘While no EM country is immune to global protectionist tendencies, having a sizable domestic market does provide a significant buffer to the exogenous risk of reduced trade.’