Top Frontier Bond Manager Sees Best Value in Local Debt

LAGOS (Capital Markets in Africa) – One of the most successful money managers in the world’s riskiest markets piled into local-currency debt this year, and plans to stick with the bet for 2018.

Kevin Daly, who runs Aberdeen Asset Management Plc’s $125 million frontier-markets bond fund, outperformed 99 percent of peers this year as he doubled investments in domestic government notes. Now almost a third of his holdings are non-dollar assets, including local securities from Egypt, Mongolia, Nigeria and Ukraine.

Daly’s wager is that the local currencies will maintain their value next year, and that the relatively short duration of the bonds he owns — an average of just 3.3 years — means the notes will hold up just fine as the Federal Reserve slowly raises interest rates. And while frontier countries are the least developed and generally considered the riskiest, their political outlook next year is relatively benign compared with the potential upheaval ahead for more developed peers classified as emerging markets.

“We are still getting pretty attractive yields in these markets so we think that will help to offset any kind of renewed dollar strength,” Daly said in a phone interview from his office in London.

The Aberdeen Global-Frontier Markets Bond Fund has returned 14 percent this year, and Daly expects that the asset class will hand investors 8 percent to 10 percent next year, two to three percentage points more than emerging markets. While frontier debt is less liquid, political risk is actually more favorable in frontier markets next year given the presidential elections in Latin America’s biggest economies. In both Mexico and Brazil, market-friendly candidates have been trailing populist counterparts.

The MSCI Frontier Emerging Markets Index of stocks rose 0.2 percent at 9:30 a.m. in New York.

The fund manager isn’t alone in his bullish outlook for frontier markets. Citigroup Inc. strategists led by Dirk Willer forecast late last month that the least developed markets will attract further flows in 2018, partly because the political calendar is heavier in some of the major emerging markets. He favors Nigeria and Egypt as particularly attractive bets.

“While frontier markets have already been in vogue in 2017, we expect this to continue in 2018,” Willer said in a note Nov. 29.

Among the additions to Daly’s fund this year were local securities from countries that got loan programs from the International Monetary Fund, such asEgypt and Mongolia.

Daly said he trimmed exposure to dollar-denominated debt this year after a rally left the securities overvalued. He cites Mongolia as the perfect example, where gains in its hard-currency notes left them at unappealing levels, thus prompting his shift into domestic notes.

“That was when we thought, ‘Well, it’s time to look at the local markets,”’ Daly said.

Source: Bloomberg Business News