The global growth story, which the world has been witnessing for the past few months, or maybe even a year, is not all good news. It poses challenges for fixed income investors, with likely rising rates and currencies. But, as always, there are opportunities.
According to Brandywine Global Investment Management, the Legg Mason-affiliated specialist fixed income manager based in Philadelphia, those opportunities include investing in Mexico and Brazil.
Anujeet Sareen, a Brandywine portfolio manager, said on a recent client trip to Australasia that Mexico, which is the firm’s largest fixed income position, was the “cheapest bond market in the world”.
He said: “There are a lot of concerns due to sentiment, because of Trump, but they are not fundamental… A 30-year Mexican bond is yielding around 7.5 per cent. Inflation may increase a bit and if you hedge you’ll give up a bit of that yield.” But there is a big buffer.
“Trump has a growth agenda and a protectionist agenda. He has to reconcile both of those,” Sareen said. “You can see that he has been shifting his stance. There are something like five million American jobs dependent on the bilateral trade with Mexico. Plus, there was already a lot of negative news in the price.”
Brandywine, which offers two Australian-domiciled trusts, as well as mandates for big investors in Australia and NZ, has about 40 per cent of its flagship benchmark-unaware ‘global opportunistic’ fund in emerging markets. It doesn’t have any European or Japanese bonds, even though they make up about 50 per cent of the index. In 2009 about 50 per cent of the portfolio was in US credits – now this is almost zero.
“In any given year the dispersion of returns among bond markets is huge,” Sareen said. “Not everything goes up and down together.”
The biggest currency position for the manager, after Mexico, is the UK pound. “We think the pound is very cheap,” he said. “Uncertainty [such as around Brexit]usually means opportunity… We think the UK trade balance with the US is likely to improve further. Europe will be one of the better-performing regions and the UK is likely to benefit from that.”
In terms of valuations, which drives the manager’s process as a long-term investor, Mexico and Brazil are the most undervalued bond markets and Germany and Japan are the most over-valued. It puts US Treasuries at about fair value.
Greg Bright is publisher of Investor Strategy News (Australia)