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By Emma Wall| 3-18-2014 6:00 AM

Which Bond Markets Offer Value?

Where are the professionals finding opportunities in the fixed income market? First State's bond manager Helene Williamson reveals her top three tips

Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and here with me today is Helene Williamson, Manager of the First State Emerging Market Debt fund to give me her three bond tips.

Hello, Helene.

Helene Williamson: Hello, Emma.

Wall: So what's the first tip in emerging market debt?

Williamson: Well I think we look at it from top down and kind of look at countries, which are well positioned in the current macroeconomic environment. And we like countries, which are exporters into Western Europe, which are tied into the supply chain of Western Europe. So one of the countries we like for example is, Romania. Romania also has an IMF programme, which is at the moment, I think about to be signed.

They have done a fair amount of structural reform with an IMF program recently and there are elections later in the year, which I think is one of the themes for emerging markets. And I think the elections give you opportunities and have risks. But that's one country where we think, is well positioned in the current environment. So we like Romanian bonds and we are overweight there.

Wall: And what's your second tip?

Williamson: We also like the Middle East. The Middle East doesn't have currency volatility because they are basically backed with the dollar. Also the oil price has clearly have been very high, and countries like Abu Dhabi have benefited very substantially from the high oil price. There is no currency risks, so there is no currency induced volatility.

And for example in Abu Dhabi, the quasi-sovereign bond trades at the same spread as Mexico, but probably has better local support. So the technical position is very good there. So that's an – it's an area where we're also overweight.

Wall: Are there other risks though, you mentioned, there is no currency risks in that region, but are there not geopolitical risks in that region?

Williamson: Yes, clearly, actually we think probably they are positive ones, because we think that it's likely that the U.S. seems quite advanced in negotiations with Iran, and we think that may lower the geopolitical risk perception in the region there, if a deal is struck.

Wall: And what about your third tip then?

Williamson: I think generically we like quasi-sovereign bonds, which are bonds which are 100% done by a sovereign, but you get a pick up over the sovereign. So in areas where we like the sovereign, for example, Mexico we think that getting paid another 60 basis points as well for essentially the same risk is very attractive. So that's another area we would be overweight.

Wall: What are the risks there? Is there a risk because it is state owned or state run?

Williamson: Yes, I think, you could argue on a standalone basis maybe their credit risk is not that good, but if you're 100% sovereign owned, I think that that you get paid well for that risk. I think the risk in – that the difference between a Mexico or Pemex, is that, Pemex may issue more debt. So you may have a technical situation, which is weaker than that of Mexico. Mexico has already said that they're unlikely to come to market at least with a long dated bond. While Pemex has indicated that there is a lot more to come from them.

Wall: But you do get paid for that?

Williamson: Yes.

Wall: Helene, thank you very much.

Williamson: Thank you, Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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