Choosing which emerging markets to invest in can be challenging. So Patrick Bradley and his team focus on higher-yielding markets.
Bradley is senior vice president of investment research at Brandywine Global Investment Management, and his firm manages the Renaissance Global Bond Fund.
He says it’s best to invest in countries that have “independent central banks. We don’t want to own a sovereign government bond where the central bank is inflating the economy,” given this reduces the purchasing power of returns.
Below, he offers a breakdown of how select markets are faring.
Bradley has unhedged exposure to Mexican bonds.
That’s because “there’s improving trade dynamics [and] a real willingness to implement structural reforms [in that region]. The country continues to attract investment, and will shortly be opening up to investment by foreign oil companies.
“We think that’s going to be a plus, and will enable Mexico to exploit the deep water oil reserves in the Gulf of Mexico.”
India’s prospects are also bright, he predicts, since the country’s acted on its stagflation.
What’s more, India’s new central bank head is building up foreign currency reserves, and the country “has a new, popularly elected government that’s really got the…political capital to make necessary reforms that are going to make the economy much more efficient.”
Bradley also has exposure to Brazil since, despite volatile markets, the country has a strong central bank.
Still, he notes, the presidential election at the end of October could impact the country’s bonds and currency. It’s a runoff between Dilma Rousseff, the current president, and economist and politician Aecio Neves.
“In our view, Neves is much more pro-business, [while] Rousseff has really governed the country poorly,” says Bradley. “The country’s stagnating, investments and consumption are declining, and now we’re starting to see some pickup in the unemployment rate.”
On the bright side, current yields of roughly 11% compensate for Brazil’s potential risks.
Bradley’s also watching South Africa. He recognizes “the structural issues, but [finds] the government does have a five-year development plan [for] additional electrical generating capacity, infrastructure repairs, and educational reform.”
The country also has “one of the most credible central banks in the world.” And that’s a good thing, given the economy is dealing with both higher inflation and deteriorating economic growth.
Looking more broadly at emerging markets, Bradley says “we’re at a point where…credible central banks have raised interest rates to get a handle on inflation issues; they’re now in a position to see some success and, possibly in 2015, will begin to drop interest rates.”