This article is part of Morningstar's Guide to Investing for Income
Emma Wall: Hello and welcome to this Investing for Income special. I'm Emma Wall and here with me today is Brett Diment, manager of the Aberdeen Emerging Markets Bond fund.
Hello Brett.
Brett Diment: Hello.
Wall: So I thought we'd start today by looking at the number of issues in the emerging bond market. There's apparently been a record amount this year, more than ever so before. Is this a good thing for investors or is it a case of quantity and not quality?
Diment: I think it is a good thing, because it shows how the asset class is broadening out. So for example, at Aberdeen, we look at over 70 different countries issuing in this space and we're looking over 300 different companies. So, lots of opportunities out there. It's all about discriminating between the good and the bad opportunities.
Wall: With bonds, I mean this is a blanket overview, but it tends to be the riskier the bond, the more you are rewarded with yield. Is it a case of sometimes it's just not worth paying for? Is a high yield indicative of the fact that it's just junk?
Diment: I mean, high yields can be indicative of potential concerns about a country or a company and may be worth avoiding or it could be that the market is discounting too much risk. So it could be an opportunity. So it really depends upon the issuer and their financial circumstances.
Wall: And where are you thinking that it's just not worth going at the moment, perhaps from a macro point of view?
Diment: Yeah. So we're relatively cautious on Turkey. Turkey has got a big current account deficit. It's about 6% of GDP, and actually more recently they've being cutting interest rates. So we're concerned that current account deficit's going to grow. So Turkey is one country we're relatively cautious on.
Wall: And Turkey was one of the Fragile Five; one of those countries that were hit by the taper tantrum. Is that something that you're still seeing playing out in the emerging markets region?
Diment: Yeah. I mean, it's those countries that have taken measures to reduce their financing needs. So, we're cautious on Turkey, but in contrast, we're relatively positive on Indonesia, India and Brazil. They've all taken measures to reduce their current account imbalances and they still offer relatively high interest rates.
Wall: Where are you seeing the greatest opportunities then?
Diment: I'd say Brazil. One part of the Brazilian market, particularly constructive on Brazilian domestic bonds issued by the government in the Brazilian currency, the real; these offer a yield of 12%, inflation is 6%. So, you have a very attractive real yield that's the difference between the nominal yield 12% and inflation 6%.
Wall: Brazil is undergoing elections quite soon, how much does that sort of influence your investment decisions?
Diment: So, the election is one thing we'll take into consideration. The markets core view is that the current President Dilma will be reelected, we think there's a chance, that one of the center-right candidates win, and that will be a positive surprise for the market. So, if you like – that's a potential positive upside from owning Brazilian bonds.
Wall: There's quite a lot of elections going on in emerging markets as a whole, aren't there? How much does that influence your investment decisions?
Diment: Again, it's all about how much the market is discounting. So, towards the end of last year, we took a position in the Indian currency, the Indian rupee. Again, because the central banks have been putting up rates, that's helping to narrow their current account deficit, and also we thought there was a change that the center-rights candidates, Modi, would win for the BJP, but indeed he has. So, that's a positive political story there.
Wall: On the whole would you say that the opportunities in the emerging market bond market are better than those in developed, because of that interest rate pressure going on in developed markets at the moment?
Diment: I would certainly say in emerging markets, again it's a very wide space. There are some certain countries with challenges obviously. We have that in Russia, Ukraine, Turkey. However, overall, for the fund that we manage, it's an investment grade on average. That's about BBB. The yield is about 6%. So, pretty attractive yield, given the credit rating in contrast to the very low yields available for example, in the U.K. or now in Eurozone.
Wall: Brett, thank you very much.
Diment: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
