Aviva: Russia Bonds are No Longer Good Value

Liam Spillane, Head of Emerging Market Debt at Aviva Investors says that there are pockets of value to be had in emerging Europe - but the best opportunities are in Latin America

Emma Wall 13 July, 2017 | 4:34PM
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This article is part of the Morningstar's Guide to Emerging Market Investing. Click here to find out just what an emerging market is and which regions hold the potential to boost your investment portfolio.




Emma Wall: Hello, and welcome to the Morningstar Series "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Liam Spillane, Head of Emerging Market Debt for Aviva Investors.

Hello, Liam.

Liam Spillane: Hello.

Wall: So, we are running an "Emerging Markets Week" this week and today, we are concentrating on Russia and emerging Europe. And we've heard from some of your counterparts that Russia looks attractive on valuation basis when it comes to equities. I was wondering is the same true for fixed income.

Spillane: Well, not today, not as much as it was. We'd make the argument that the valuation argument for fixed income for emerging market debt in Russia has materially changed in the last few months. That’s particularly related to the policy objectives of the central bank and inflation. So, there is still an attractiveness in fixed income for Russia, but not as attractive as it was a few months ago.

Wall: And if we move slightly further west into emerging and Eastern Europe, where are you seeing pockets of value or indeed individual cases which you think are attractive?

Spillane: I think pockets of value is the right way to think about it. Certainly, relative from a regional perspective to some of the other regions, central and Eastern Europe isn’t as attractive. But underneath that, we really like the Polish currency, Polish złoty. And we particularly like the idea of higher rates in Czech Republic which we are aware is a position that the market holds. We are not alone. It is somewhat consensus. But certainly, those two markets are ones that we prefer.

Wall: And I suppose that is an important case worth making, because unlike Western Europe which is mostly dominated by Eurozone of course Eastern Europe and Central Europe a lot of them have their own currency and that really plays into fixed income investing.

Spillane: Absolutely. I mean very much requirement for differentiation here. As we evolve through higher yields globally and we move into that cycle that we expect to have in coming quarters, beneath a differentiation is quite important. And you are right the currencies are particularly obvious differentiator for those countries.

Wall: And central banks in the west are expected to start raising interest rate soon. Some of them already have with the U.S. Is that the case also in Russia and emerging Europe?

Spillane: I think the Russian rate cutting cycle is probably coming to an end or at least is well priced by the market now. There are again a need for differentiative use within Central and Eastern Europe, I mean the Hungarian Central Bank is continuously dovish. The market has been waiting for the Polish Central Bank to become a little bit more hawkish and raise rates. But broadly speaking there is not really a great deal happening there at the moment. Albeit there are some underlying inflation re-trends happening.

Wall: And you are of course head of emerging markets debt. So, it doesn’t mean you can look across the world for investment opportunities. Where are you seeing the most compelling opportunities if they are not in Russia and emerging Europe.

Spillane: Really, we are focusing most on those countries that have been able or willing to reform financial reform and those that have the most attractive valuation. So particularly we are looking at Indonesia, local bonds at the moment, we have an investment there. And also, Mexico, there has been a lot of well documented concerns around Mexico. But I think the long-term valuation argument there is very strong and then looking at some of the other smaller countries, perhaps Peru local government there is one of our favorite markets as well.

Wall: Now Mexico argument is quite interesting because a lot of people are going off the equities despite a positive performance because of the threat of Trump and the sanctions that he may introduce, the trade restrictions but with fixed income that’s not a concern for you.

Spillane: I think it is a concern, but it’s a diminishing concern. If we take this back six months ago to post the U.S. election it was a very valid and present concern. But as we move forward and Trump administration gets, the world gets more familiar with the Trump administration. I think we still see that as a little bit of a concern but not too much and as I say the long-term valuation attractiveness of Mexican assets kind of supersedes that now and gives us quite high conviction in that market.

Wall: Liam, thank you very much.

Spillane: Pleasure, thank you.

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

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Emma Wall  is former Senior International Editor for Morningstar

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