Despite Headlines, Portfolio Manager Sees Opportunity With LatAm Debt
Some negative headlines have emerged in recent weeks from various Latin American nations, in turn pressuring the region's equity markets and the relevant U.S.-listed ETFs. For example, news of the seizure of Colombia's largest brokerage house has roiled the Global X FTSE Colombia ETF (NYSE: GXG).
Venezuela's re-election of Hugo Chavez and the reaction by the result of last week's U.S. elections, which have weighed on the iShares MSCI Mexico Investable Market Index Fund (NYSE: EWW), stand as other examples of recent headline risk for Latin American equities.
Even with those risks, at least one portfolio manager still sees opportunities with the region's bonds.
"If you just read the headlines, you might surmise that Latin American countries are presenting the debt markets with multiple reasons to be concerned," said Market Vectors portfolio manager Francisco Rodilosso in a note. "But, bad news can also bring opportunity."
Despite what what Rodilosso described as "discouraging developments," some ETFs with heavy exposure to Latin American bonds have held up well in recent weeks. The Market Vectors LatAm Aggregate Bond ETF (NYSE: BONO) has jumped 1.5 percent in the past month.
BONO, which pays a monthly dividend and features a 30-day SEC yield of almost 5.4 percent, allocates more than 59 percent of its combined weight to Mexican and Brazilian bonds. Venezuelan issues comprise another 10.6 percent. When accounting for regional headline risk, it is still worth noting that more than two-thirds of BONO's holdings are rated investment-grade.
"Brazil is certainly one of those markets where we think bad news may allow investors to find credit opportunities, " said Rodilosso.
Brazil and Mexico combine for nearly 15 percent of the Market Vectors Emerging Markets Local Currency Bond ETF's (NYSE: EMLC) weight. That ETF is down modestly in the past month, but factor in the monthly dividend and a 30-day SEC yield of over five percent and the losses are erased. Nearly 61 percent of EMLC's holdings, which are denominated in local currencies, are rated investment-grade.
"You can see silver linings," Rodilosso noted. "One includes the fact that Venezuela has continued to exhibit a willingness to pay the high rates demanded by the market during the nearly 14 years of the Chavez regime. Also, Mexico has made significant economic gains in recent years, making it far more competitive with China as a global manufacturing hub. There are a large number of Mexican corporate bond issuers that are benefiting."
The reelection of Chavez, though never in doubt, was seen by some traders as potentially negative even for Venezuelan debt, but ETFs offering ample exposure to the country's bonds have also held up well in the past month.
The Market Vectors Emerging Markets High Yield Bond ETF (NYSE: HYEM), the first ETF to focus on junk bonds issued by developing nations, features a weight of almost 8.2 percent to Venezuela. That ETF, with a 30-day SEC yield of 6.6 percent, has risen modestly in the past month.
Overall, Rodilosso views the outlook as more positive than negative for investors in Latin American bonds.
"While volatility has certainly made its presence felt in recent months in many countries, there are many of what I would call ‘un-emerging market' forces at work at the same time. Low debt-to-GDP ratios, high FX reserves and a long list of private sector borrowers have shown the ability and willingness to continue servicing their debt throughout the economic and credit cycle," he said.
Rodilosso serves as the portfolio manager for BONO, EMLC and HYEM which combined have over $1 billion in AUM.
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