Alliance’s Valenzuela avoids ‘grabbing yield’ in EMD


Alliance Trust bond manager Juan Valenzuela is restricting his emerging market exposure to Mexico, while avoiding opportunities to “grab yield” in other emerging market economies.

The co-manager of the £57.7m Alliance Trust Dynamic Bond fund explains that he does not have a high exposure to emerging markets currently, as part of a reduction in credit risk on the portfolio made earlier this year.

He says: “We thought that credit had gone too far and was fully priced in some areas, while the market was getting a bit complacent, so we reduced some of the credit risk on the portfolio.

“Ultimately you could argue that emerging markets are like credit, they are slightly different, but in effect they are credit.”

However the fund continues to have “marginally” long position in Mexico following signs that the country’s economy is improving, says Valenzuela.

He adds: “We see Mexico as the main beneficiary of the US, because it is an economy that is very exposed to the US.

“It is also implementing some macroeconomic reforms that we think will benefit the medium and long-term outlook for the economy.”

Valenzuela goes onto argue that the investment case for Mexico is “fundamentally sound”, compared to other emerging market economies offering high yields.

He says: “Economies where people tend to go just to grab yield, such as Turkey, Indonesia and even Brazil, have been benefitting a lot from capital inflows.

“However the risk is that once liquidity is removed from the system, people repatriate some of their flows.”

Further risk is created by the fact that in some cases, these economies have also been funding their current account deficits through capital inflows, says Valenzuela.

He adds: “If these capital inflows stop or reverse, that negative current account is going to be quite apparent.

“From this point of view we don’t think that some of the yields are attractive enough for us to invest in this kind of environment.”