Eaton Vance’s Gaffney sees alternative in rising market-denominated bonds


NEW YORK (Reuters) – There are untapped alternatives in company debt securities denominated in emerging-market currencies, Eaton Vance’s director of diversified fixed-income stated on the Reuters International Funding 2019 Outlook Summit on Friday.

Kathleen Gaffney, vp, director of diversified fastened revenue and lead portfolio supervisor for Eaton Vance Administration, speaks in the course of the Reuters International Funding 2019 Outlook Summit in New York, U.S., November 16, 2018. REUTERS/Brendan McDermid

Kathleen Gaffney has put 30 p.c of her fund’s $850 million in property below administration in non-dollar denominated debt. “Most fastened revenue traders don’t take into consideration forex, and that might be the important thing to outperforming in 2019,” she stated.

Rising market currencies have been battered this 12 months because the U.S. greenback has rallied on sturdy financial fundamentals and investor flight-to-safety as commerce tensions and geopolitical uncertainty have risen. However with the MSCI Worldwide EM Value index down greater than 15 p.c this 12 months, Gaffney stated she is betting there’s little room left for emerging-market currencies to fall.

Gaffney’s fund at the moment holds property priced in Mexican pesos, Brazilian reais, Indian rupees, Indonesian rupiah in addition to some in Turkish lira. She additionally cited commodity-backed currencies just like the Australian, Canadian and New Zealand {dollars} as an efficient hedge in opposition to inflation.

“In rising markets, you will have the 2 pillars of optimistic fundamentals: reform potential and forex, that if the greenback depreciates might be supply of fixed-income returns,” Gaffney stated.

An inflation shock within the 12 months forward, she expects, will finish the greenback rally. The U.S. unemployment charge at the moment stands at a 49-year low of three.7 p.c, and wages recorded their largest annual achieve in 9-1/2 years in October as U.S. job development rebounded sharply. Even when the Federal Reserve continues to hike rates of interest, the tight situations of the labor market may nonetheless spur an increase in inflationary pressures.

Though the Fed is now tightening financial coverage, the seven-year interval throughout which charges had been at zero created a swath of over-valued firms within the U.S. market, Gaffney stated. The simple entry to credit score led some to load up on leverage, which traders, starved for yield, eagerly soaked up.

With company leverage at all-time highs and the Fed elevating the price of borrowing, “it’s important to now pay extra consideration to what you’re shopping for in funding grade credit score. The main target has to return to firm fundamentals,” stated Gaffney.

This security-specific strategy to investing has stored Gaffney out of credit which have fallen sharply as liabilities, poor returns or sector weak spot has come to mild: Normal Electrical (GE.N), PG&E Corp (PCG.N) and Tesla Inc (TSLA.O).

Because the economic system nears the tip of this enterprise cycle, credit score length “is now a headwind slightly not a tailwind,” she stated. Fastened-income traders who keep on with historically enticing credit score – long-duration investment-grade – with out evaluating the basics of the particular safety are more likely to carry out poorly, stated Gaffney.

Observe Reuters Summits on Twitter @Reuters_Summits

Reporting by Kate Duguid; Modifying by David Gregorio

Author: Maxwell C.

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