Brandywine Global sees opportunity in EMD
Selling of high yield fixed income assets has created a number of opportunities in the hardest hit emerging market bonds and currencies, according to Legg Mason subsidiary Brandywine Global.
Brian Hess, co-manager of the $614m Legg Mason Brandywine Global Fixed Income Absolute Return Fund, said the change has created opportunities to buy.
“Any kind of volatility creates opportunities and there are markets we did not own coming into the turmoil that we can now think about buying. Indonesia’s bonds and currency stand out so we are watching them closely. Similarly, we did not have exposure to Colombia, but, having been hit hard, it is another country in which we are interested.”
Hess sees particular opportunity in Thai bonds and the baht, as well as the Philippine peso.
Key to the emerging value is what Hess describes as market over-reaction to hints that the US Federal Reserve is to trim its QE programme. EMD and currencies were hit as the US dollar strengthened.
Hess added that fears of a hard landing by China are overdone, but at the same time the country’s rebalancing of its economy will “remove a major pillar of demand support for many industrial commodities.”
Recovery in the US private sector is set to continue, he adds.
“We see tapering as likely in the fourth quarter but at the same time, because inflation metrics are so far below Fed targets, there is no imminent prospect of rate hikes. It is important to separate the two, as rate hikes are likely to be more disruptive to markets than tapering QE.”
Hess says 30-year US treasury yields could be back above 4% and 10-year yields above 3% in the next six to nine months, as long as the economy continues to evolve in line with expectations.
“That should help the dollar, particularly against developed market peers, but also against EM currencies. We are therefore even more bullish on the dollar than earlier in the year and feel higher rates and less QE in the US should underpin it.”