What Emerging Market Debt Bubble? Galloway's Shor Sees No Signs

(Bloomberg) -- Galloway Capital Management founder Nathan Shor isn’t seeing signs of a bubble percolating in emerging-market credit.

“I can imagine that a lot of people in the market think that, but we don’t believe that’s the case,” Shor, who is based in Sao Paulo, said in an interview. On a rising scale of one to ten he puts the chance of a bubble at most at a four. And that’s “being cautious,” he said.

That’s not to say Shor doesn’t see risks: he’s steering clear of situations where recovery levels are hard to gauge, citing Brazilian companies in distressed situations such as Odebrecht SA and Samarco Mineracao SA. He has no plans to re-enter Venezuela which in November missed bond interest payments, after exiting two years ago.

The sugar industry, plagued by a growing supply glut, has concerned Shor since July. While he’s following the situation in North Korea, he’s taken advantage of geopolitical jitters to add positions in some Asia credits.

Bonds of developing nations have become a magnet for yield-starved investors this year, as global central banks gradually pull back on stimulus making the higher interest rates on the debt all the more appealing. That’s pushed emerging market credit spreads to multi-year lows, and elicited warnings from some corners the tide will draw marginal sellers.

The $105 million Galloway Emerging Markets High Yield Bond Fund Shor co-manages with Ulisses de Oliveira is about 50 percent invested in Latin America. Brazil accounts for 22.5 percent, Africa for 15 percent, China for about 8 percent and Russia 2 percent of the fund, Shor said. The remainder is spread between Indonesia and other East European countries.

Shor said Chilean corporate bonds offer good risk-reward and its largest position is in electricity company AES Gener SA’s notes due 2073, with a call option in 2019. In Mexico, Shor recently sold all the fund’s Cemex SAB de CV bonds for some profit after a “very good run with the name.” The fund still owns new issue Petroleos Mexicanos bonds due 2027 in addition to some financial companies, including BBVA Bancomer, which it its largest position.

He’s lately increased the duration of the fund’s Ecuadorian sovereign bonds by exchanging some 2020 notes with securities due in 2026. In Argentina, he favors bonds sold by provinces which the federal government won’t allow to default to avoid contagion risk. When it comes to China, Shor said he only invests in companies that have equity, “so we use the equity as the canary in the mine.” He likes Country Garden Holdings Co. and Agile Group Holdings Ltd., he said.

To contact the reporter on this story: Pablo Gonzalez in Buenos Aires at pgonzalez49@bloomberg.net.

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Sally Bakewell

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