Coutts has bought into emerging market debt across its portfolios having long been underweight the asset class.
In the mid-year investment outlook, the firm says it favours emerging market debt and investment grade credit to government bonds due to their lower interest rate sensitivity and potential for higher returns.
“Reflation implies that growth and inflation should normalise from their low mid-2016 levels, followed by central bank normalisation,” the outlook says. “This environment is typically positive for risky assets such as equities, in particular information technology and financials, and high yield bonds. We expect this trend, which started in the US, to persist in the medium term and become more prominent in Europe.”
Monique Wong, senior portfolio Manager at Coutts says the team used weakness in emerging market debt on the back of President Trump’s protectionist rhetoric as a buying opportunity.
“In essence, we do not believe that the president will be able to implement his views in the extreme,” Wong says. “Emerging market macroeconomic conditions are improving. Growth is recovering and inflation is falling, which supports the currency and should contribute to capital gains in the bonds. In addition, the 6 per cent coupon is attractive.”
Wong says a Coutts balanced fund now typically holds around 2 per cent in the Blackrock Global Funds Emerging Market Local Currency Debt fund.
“The fund manager takes a macro approach and has a good track record, with expertise in managing both emerging market fixed income and currency risks. This is important because the currency volatility and performance contributions are significant. The fund’s largest holdings are in Brazilian, Russian and Mexican bonds.”
Mohammad Syed, managing director and head of global markets at Coutts, is bullish on the “stable” global economy, which he says is underpinned by US growth supporting the markets.
“The investment themes we set out at the beginning of the year have performed well, and we continue to see potential for growth in these areas,” Syed says.
“In the meantime we’ve added emerging market bonds to our portfolios and funds, to benefit from strengthening economies in the developing world. As ever there are risks on the horizon but uncertain times bring new opportunities into view. Change is inevitable, and making sure your investments are positioned for the future is key to meeting the challenges ahead.”