Aberdeen Asset Management’s top picks
Aberdeen Asset Management, one of the largest asset managers invested in emerging markets, is bullish on:
- Latin America: Argentina and Brazil’s local currency bonds
- Africa: Ghana’s local currency bonds
Argentina- local currency bonds
Last year, Aberdeen’s big bet on Argentina (ARGT) yielded well for the fund. Following the December 2015 currency adjustment and the high yields on offer (close to 30%), Aberdeen Asset Management decided to take a position to capitalize on the economy’s prospects. One year later and the potential still shines bright for this emerging market (EEM) (VWO) economy. Kevin Daly, the emerging markets debt manager at Aberdeen, believes that inflation would remain high in Argentina for a short period, but would eventually come down.
Recently, we saw Argentina’s local currency bonds being added to the JP Morgan local currency bond index, the JBI universe which serves as a benchmark index to about $200 billion in assets. Yields today on these bonds are already down to a 14.5% – 16% range. However, Daly still sees potential for addition gains from the position, although it may not be as robust as last year. Inflation is still expected to close 2017 at 20%, with the government’s target set around 12-17%. So, it may take a while for the inflation rate in Argentina to converge to single digits (8-10% area). So, as an investor, you may have to wait to reap gains from these local currency bonds.
Aberdeen’s view on these bonds remains bullish under the belief that they offer certain value to investors who are willing to take a longer-term view.
Brazil- local currency bonds
Despite the impeachment of Dilma Rousseff, and corruption charges against former president Luiz Inácio Lula da Silva, Brazil (EWZ) was one of the best performers in the currency and other markets last year.
Brazil is another big bet in Aberdeen’s investment portfolio. Yields on Brazilian local currency government bonds are still amongst the highest in emerging markets. Right now it’s about 11.3% on a 10-year benchmark bond. Inflation expectations are expected to converge to about 5% by year-end. Last year was slow in terms of rate cuts in Brazil (just two small ones). The economy is improving but still showing no growth. But now, since the economy continues to decline and growth expectations are roughly zero, Aberdeen expects the central bank to cut rates aggressively this year. Yields on this 10-year benchmark bond could drop below 9.5 or 9%. This highlights a strong opportunity in local currency bonds in Brazil.
The current account deficit is going to be somewhere around 1-1.5%, as Brazil is more than fully covered by FDI (two times), so financing the current account is not an issue in Brazil. The currency is likely to remain pretty stable, while yields on local currency bonds are likely to rise over the course of the year.
We should also see debt stabilizing now in Brazil at around an 80-85% debt-to-GDP ratio . Over the past two years, recessionary conditions have led to a rise in the debt-to-GDP ratio for the economy.
Due to Nigeria’s forex restrictions imposed by its President, Muhammadu Buhari, the economy was a poor performing market in 2016. Ghana (EZA), however, holds better prospects after a smooth election and the transfer of power to President Nana Addo Dankwa Akufo-Addo.
According to Daly, Ghana did very well in 2016 and should continue to do so in 2017.
The leading points that Daly made in favor of Ghana, are:
- According to Daly, investing in Ghana implies you’re getting paid to take the risk. With local currency bond yields at 18-19%, investors are adequately compensated for the risk they bear by investing in this frontier market.
- The new government, under the leadership of President Nana Addo Dankwa Akufo-Addo, seems more prudent on the fiscal side.
- Inflation is expected to fall in the light of anticipated interest rate cuts
- Oil production is expected to pick up soon