Dogs of High-Yield Sovereign Debt Keep Winning Streak Alive

LAGOS (Capital Markets in Africa) – Investing in the world’s highest-yielding debt has proven a winning strategy over the past decade. Last year was no exception.

An equally weighted portfolio of bonds from the six highest-yielding emerging markets would have returned 19 percent in 2017 versus a 9.3 percent return for JPMorgan Chase & Co.’s benchmark index, according to Seaport Global Holdings LLC. It marked the eighth time in nine years the “mutts,” as fixed-income strategist Michael Roche calls them, outperformed.

The 2017 group of Angola, Belize, Iraq, Mongolia, Mozambique and Venezuela benefited from foreign aid packages, increased demand for high-yielding assets and timely misfortune. First-quarter credit events in Belize, Mongolia and Mozambique allowed enough time for prices to advance, Roche said. Meanwhile, Venezuela’s second-half meltdown didn’t materially harm the cohort’s overall performance.

This year’s group features Angola, Belize, Ecuador, Lebanon, Tajikistan and Ukraine. To qualify, a nation must be in good payment standing at the start of a year, which disqualifies Venezuela and Mozambique in 2018. Roche sees particular upside in Angola on rising oil prices and an economic overhaul by President Joao Lourenco as well as Belize, which should have lower repayment pressures after completing a debt restructuring in March.

Of course, high-yield implies greater credit risk, and while the strategy is well suited to eras when the riskiest assets are in favour, if that reverses things could end badly. The group’s two newcomers, Tajikistan and Lebanon, could go the way of Venezuela and see substantial losses this year, Roche said. Poor reception to Tajikistan’s inaugural bond sale and a credit account deficit above 6 percent of gross domestic product underscore the nation’s unfamiliarity with external bond finance. Beirut’s on-going rift with Riyadh poses a risk should war visit the country and spur capital flight, he said.

Source: Bloomberg Business News