The strategy has been gaining traction across Wall Street, helping a handful of money managers beat the returns across traditional emerging-market investing. Vontobel Asset Management and Abrdn Plc., whose flagship EM hard-currency funds have beaten at least 89 percent of peers over the past year, are among those who’ve benefited from the trade.
Some of the money managers have plowed into bonds likes those from Argentina, a serial defaulter, and Sri Lanka and Ukraine, both of which are restructuring their debt. The top five performers in a broad-based gauge tracking sovereign, emerging-market dollar notes—all of which are “special-situations” trades—averaged a 97 percent return over the past year, versus a 13 percent gain for the index, according to data compiled by Bloomberg.
“This wave of defaults didn’t materialize,” the Zurich-based portfolio manager said. “Most high-yield issuers have already regained market access and have been or will soon be able to refinance.”SO many money managers have moved into the trade that spreads in distressed countries including Argentina and Ecuador have tightened, suggesting the room for additional gains could be limited.
That has caused a shift to focus on local-currency bonds. Aggressive campaigns to hike rates in countries like Nigeria and Egypt and the implementation economic measures make them compelling bets. Risks remain, with local EM debt particularly vulnerable to the strength of the dollar on the back of a delayed easing cycle in the US. Moreover, limited liquidity for some of these notes may pose a challenge, according to Arif Joshi at Lazard Asset Management in New York, who supervises about $9 billion as co-head of the emerging-market debt team. He says it’s much more difficult on the local frontier side to make a one-year structural trade than it is on the dollar-denominated external side.
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