A $273 Billion Fund Calls Double-Digit Returns on Emerging Bonds

(Bloomberg) -- Emerging- and frontier-market dollar bonds will more than recover from last year in 2019 as the trade war winds down and China takes steps to support its economy, according to NN Investment Partners.

Developing notes will rise 5 to 10 percent, while returns from frontier securities should exceed 10 percent, said Leo Hu, senior portfolio manager for hard-currency emerging-market debt at NN Investment, which oversees the equivalent of $273 billion. That compares with 4.3 percent and 5.8 percent declines, respectively, in 2018, JPMorgan Chase & Co. indexes show.

“Trade tensions will likely be resolved and policy makers will make the right decision to stabilize economic growth in China,” the Singapore-based Hu said in an interview. “That’s setting a very good scene for this year.”

A $273 Billion Fund Calls Double-Digit Returns on Emerging Bonds

Sovereign dollar bonds from non-developed nations took a beating in 2018, with yields rising the most in a decade, as Treasury yields rose and the trade dispute between the U.S. and China worsened.

The average yield on international notes issued by emerging sovereigns rose 159 basis points to end 2018 at 6.864 percent, according to JPMorgan’s EMBI Global Diversified index. The rate from frontier nations increased 205 basis points to close last year at 7.94 percent, the firm’s Next Generation Markets index showed.

The moves last year have created a cushion if U.S. rates rise further, Hu said, adding that the market would need to sell off massively to erase the carry trade benefits, which is an unlikely scenario, he said.

Below are some of the countries he’s favoring this year:

Bahrain

  • It’s a country with “explicit support” from Saudi Arabia
  • Investors can get additional spread of more than 200 basis points by owning Bahrain’s dollar bonds over similar Saudi Arabian debt
  • Bahrain’s 2029 dollar bonds were trading with a yield of 6.91 percent on Tuesday compared with 4.38 percent for similar-maturity notes of Saudi Arabia

Zambia

  • Valuations are very attractive, with a spread of more than 1,100 basis points over Treasuries in JPMorgan indexes, behind only Venezuela, Hu said
  • There’s a chance it could enter an International Monetary Fund program, which would lead to some reforms, he said
  • The bears have already sold and there’s not likely to be further selling pressure
  • Credit pressures in some sub-Saharan African nations should ease in 2019 and regional economic growth could accelerate to 3.5 percent this year from an estimated 2.8 percent in 2018, Moody’s Investors Service said in a statement
  • Zambian bonds have been “unjustifiably beaten up,” given the nation’s ability to refinance its bilateral loans with China and its next eurobond maturity date is not until 2022, Delphine Arrighi, an emerging-market debt portfolio manager at Merian Global Investors, writes in note

Papua New Guinea

  • The diversified commodity exporter doesn’t have a current-account crisis and is trying to improve its institutions, Hu said
  • Rated B2 by Moody’s, its dollar debt due 2028 offers a spread of more than 500 basis points over Treasuries

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