Hunting contrarian opportunities
Cyprus fixed income plays: Stephane Fertat, T. Rowe Price fixed income portfolio specialist
When Cyprus came back to market back in April 2015 with the announcement of new seven-year bonds, we saw an opportunity to invest into an improving country. While rating agencies still rate Cyprus as a B- rated country, we expect on our side that it could be upgraded to BB once the economic growth returns and the restructuring debt program is completed.
Importantly, we expected Cyprus bonds to become eligible to the ECB QE program pending some reforms to be passed at the Parliament. It became official in July when the ECB bought the equivalent of €98m on the secondary market as part of their overall bond purchase program, giving additional support to the security.
China equities: Frank Yao, manager of the Neuberger Berman Greater China Equity Fund
It is possible that China equity markets will continue to experience a period of elevated volatility, as growth concerns and investor nervousness form a seemingly endless feedback loop. Notwithstanding, we remain optimistic on China’s long-term prospects as it transitions towards a broad path of more sustainable, higher-quality growth.
However, equity valuations are beginning to look interesting once again. As at the end of August, the CSI 300 and MSCI China indices traded at forward price-to-earnings ratios of about 12.6x and 9.2x, respectively. These are far from nosebleed valuation levels, presenting potential opportunities – particularly with respect to certain listed companies with robust business models and run by management teams with proven execution track records.
EM distressed debt: Tim Beck, manager of the Stenham Credit Opportunities Fund
We remain bearish on many areas of current credit markets, but we are still finding pockets of opportunity. One such area we have recently made an allocation to is in emerging market distressed debt. Many economies in the developing world face serious headwinds. There is slowing growth in China, fund flow reversals as US interest rates rise and, for some, continued challenges with the price of commodities. This is going to open up a lot of opportunities in distressed areas of the market
Elsewhere in credit markets, we have started to see many commodity-related areas coming under pressure. Ultimately, debt trading at levels of 20c or 30c on the dollar is unsustainable – which means we will continue to see volatility in the market. We remain focused on the structurally inefficient areas of the market – primarily in structured credit and distressed debt. We are currently focused on non-agency RMBS and CMBS. While these parts of the market have performed strongly, we still see opportunities to add value.