Investors may have been skittish in early April, but the general trend appears to be “risk on” once again, according to Patrick Bradley, product specialist with the global fixed income team at Brandywine Global Investment Management, which manages the Renaissance Global Bond Fund.
“We do see investors becoming more confident in the global economy,” Bradley says. “Oddly enough, it seems to be a calendar-year phenomenon; when the calendar changed from 2011 to 2012, many investors seemed to conclude that the world was not going to end.”
Far from a doomsday scenario, many investors seemed to recognize that the volatility that marked 2011 had created many excellent buying opportunities.
He had begun to take on more risk in the portfolio toward the end of the third quarter of 2011—that’s when we added to our Mexican bond position, for example.”
“What really sparked a change in sentiment by global investors seemed to us to occur in December of 2011,” Bradley says. “That’s when the ECB offered low interest loans to financial institutions in Europe to help with the liquidity crisis.”
That event signaled the central bank’s willingness to use its balance sheet to prop up the banking industry.
“What we’re looking at now, as a general theme, is taking on a little more risk in the portfolio,” he says. “We’re looking for countries and regions that have some sensitivity to global economic activity.”
He says opportunities are popping up in developing economies because they are enjoying stronger economic growth rates and while providing higher yields on fixed income. These jurisdictions include parts of Latin America broadly (and Chile in particular) and South Africa.
“While we might think the US is the most attractive developed market, our tendency would be to avoid markets like Japan and the Euro communities,” he says. “We’ve been out of Europe for quite some time, with the exception of a very small exposure to Germany.”
This aversion to Europe was initially driven by the view that the euro was overvalued, but was reinforced when the Greek debt crisis hit.
“We’re not avoiding Europe altogether,” he points out. “We’re getting our exposure to Europe from peripheral economies, like Poland.”
He says he is overweight both in Polish bonds and the zloty, the local currency. But his currency plays are not restricted to the periphery.
“We also have an overweighted exposure to British pounds sterling,” he says. “Relative to the euro, we see pounds sterling as undervalued.”