The theme of falling oil prices continues to dominate the emerging bond markets debate. The turmoil in the Russian financial market is starting to have an impact on emerging markets, and it is more important than ever to treat the asset class with a selective and careful approach to diversification. As always, there will be winners and losers, even in the current context.
Much of the focus has been on the BRICs, but there is a large and diverse group of more than 60 emerging countries from which to select the best opportunities, with different markets and economic cycles. The winners are mainly in Eastern Europe, where a positive story of rebalancing is unfolding. Most countries have already achieved stability, are stronger and are growing faster than other regions.
The South American area offers attractive opportunities for exposure to local bonds, as the various economies have weak economic growth momentum and rates, in most cases, are normalized or are attractive in terms of valuations. In particular, we are watching interest rates in Brazil which has performed well following positive political developments, with the appointment of a new finance minister favoring a market economy. We think good investment opportunities can also be found in some small frontier markets currently overlooked by investors, such as Sri Lanka and the Dominican Republic.
With regards to duration, we believe that the yield curve of Brazil and Colombia is attractive, as in these countries the central banks have already embarked on the path towards rate hikes and the real yield curve offers attractive valuations relative to fundamentals.
In the foreign exchange market we added long positions on the Polish zloty, the Hungarian forint and the Indian rupee based on strong economic growth momentum and due to improving external fundamentals. We have also introduced short positions in markets whose currencies are linked to the performance of commodities, such as the Brazilian real, the Colombian peso and the Peruvian Nuevo Sol, whose valuations are not yet cheap, especially when compared with the Chilean peso.
