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Pimco, Schroders Favor Latin America Bonds on Pro-Business Tilt

Pimco, Schroders Favor Latin America Bonds on Pro-Business Tilt
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Thursday, 07 September 2017 11:48 AM

Investors including Pacific Investment Management Co. and Schroders Plc say a rally in Latin American bonds has further to go as economic growth picks up and governments across the region pursue measures designed to make doing business easier.

Notes from companies based in Argentina, Mexico and Brazil have returned at least 10 percent this year on average, trouncing the benchmark emerging-market index and outpacing major peers. JPMorgan Chase & Co.’s regional gauge has outperformed the broader measure of bonds from developing economies by more than 3 percentage points.

Latin American notes have been supported by a jump in corporate profits -- earnings are up almost 20 percent in the second quarter from a year earlier -- brought on by the fastest economic growth since 2013. Traders see the rally getting fresh support from measures such as a pension overhaul in Brazil, a loosening of price controls in Argentina and fiscal tightening in Mexico.

“The broad outperformance in Latin America -- particularly Argentina, Mexico, and Brazil -- speaks to the broad reform programs we have seen in each of these countries and the stable backdrop these reforms have provided,” said Kofi Bentsi, a money manager focused on emerging-market corporate bonds at Pimco, the second-largest U.S. fixed-income management firm. He says Argentina and Brazil are likely to continue to outperform. 

Jim Barrineau, the co-head of emerging-markets debt at Schroders in New York, said the region has benefited from a combination of the highest yields among emerging markets and improving economies, especially in Argentina and Brazil, which overcame deep recessions. This backdrop, he says, tends to favor corporate bonds over government securities.

“They are more responsive to changes in economic growth,” said Barrineau, who helps oversee Schroders’ $520 billion in assets. His emerging-market bond fund has outperformed 81 percent of peers this year.

After two years of recession, Latin America’s gross domestic product will expand 1.1 percent this year and 2.4 percent in 2018, according to the median estimates of analysts surveyed by Bloomberg. While those rates still trail the emerging-market average, the huge improvement is enough to convince investors that the region is on the right track.

Christian Diclementi, a portfolio manager at AllianceBernstein says Latin America has seen the most significant economic fundamental improvement of any region. He cites not only the pickup in growth, but also slowing inflation, improvement in the external and fiscal balances and a political shift toward measures that are less populist.

"We expect Latin American corporates to continue to outperform for the rest of the year," said Diclementi, who helps manage an emerging-market bond fund that has beaten 77 percent of peers this year.

In Argentina, President Mauricio Macri has loosened the government’s control on utility prices after taking over from Cristina Fernandez de Kirchner in 2015. He has signaled the intention to do the same for oil next year. Notes from crude producer YPF SA have returned more than 18 percent this year, while energy companies Pampa Energia SA, Generacion Mediterranea SA and Empresa Distribuidora y Comercializadora Norte SA are also among the country’s best performing bonds, handing investors at least 13 percent.

“As energy prices transition to global market prices, we would expect the sector to continue performing well,” Bentsi said. “The transition from Kirchner to Macri, and the reforms since, particularly energy reform, have boosted Argentine corporates.”

In Brazil, President Michel Temer’s efforts to trim the budget deficit and improve the debt trajectory have also bolstered the outlook for the corporate sector. Bonds issued by state controlled oil producer Petroleo Brasileiro SA are among the country’s best performing notes, with five different maturities returning more than 22 percent. The company’s $3.5 billion notes due 2023 were up 0.1 percent to 98.6 cents on the dollar as of 10:18 a.m. in New York.

"The reforms in Brazil may come slower than markets are expecting, but growth is returning, rates are coming down and the macro trajectory is good," said Jack Deino, head of emerging-market corporate debt at BlackRock Financial Management Inc. He favors oil and gas and financial companies in Brazil.

Mexico’s corporate bonds are rebounding from the slide following Donald Trump’s election and investor fears regarding Nafta. Notes from department-store operator Grupo Famsa SA de CV, which posted the worst slide after Trump’s victory, are now the best performing bonds in Mexico, with a 54 percent total return this year.

BlackRock’s Deino says some of the biggest gains in Latin America may be over, but he still sees buying opportunities in Argentina and Brazil.

“That still is an asset class to be involved with, but active management and security selection is very important,” Deino said. “You can do very well in emerging-market corporate debt over the next year or two.”

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Investors including Pacific Investment Management Co. and Schroders Plc say a rally in Latin American bonds has further to go as economic growth picks up and governments across the region pursue measures designed to make doing business easier.Notes from companies based in...
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Thursday, 07 September 2017 11:48 AM
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