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Michael Ganske, Axa Investment Managers: «EM markets performed much stronger than expected by many market participants, including us»

March 28, 2017 - Cbonds

 

Michael Ganske, Global Head of Emerging Markets, Axa Investment Managers, will be a moderator of Institutional investors panel on VI Cbonds Emerging Markets Bond Conference.

In an interview for Cbonds Review magazine he answers the questions about key risks for EM investors, expectations related to primary market deals in EM and the most prospective investment ideas.

- What risks are of primary importance for you as institutional investor?

What we want to achieve for our clients is a sustainable performance in line with the return objective and risk profile. The risk profile of our funds is of primary importance here. Risk management is in particular important for an asset class such as emerging markets fixed income where market performance is driven by macro fundamentals, political developments and market sentiment. A well-diversified portfolio strategy that is mitigating idiosyncratic risks is crucial in this context. At AXA IM we have a global team of 17 dedicated investment professionals managing USD8bn in emerging markets fixed income. Six dedicated EM analysts combine a top down and bottom up research process that enables us to come up with a fundamentally underpinned investment strategy. Their views are reflected in the various EM strategies we manage and portfolio managers and analysts work hand in hand for the benefit of our clients. A stringent investment process is used to manage a broad range of EM bond funds that have different risk reward profiles.

- Don’t you think that today geopolitical risks are key for investors (Brexit, Trumponomics, prospects of France leaving the EU)? Or do you consider geopolitical risks to be overestimated? How can it impact the situation with EM debt?

In our view geopolitical risks are important for financial market performance. They determine the development of economic fundamentals, risk sentiment and with it risk pricing in financial markets. The political surprises seen in 2016 will have a longer term impact on the trajectory of the global economy and individual countries. For example, the stance of the Trump administration towards trade will impact the global trade landscape. It remains to be seen what the actual policies will look like. Expansionary fiscal policy in the US will likely have a positive growth impulse on the US and the global economy. We believe the inflationary impact and increased refinancing needs will impact global fixed income markets. In a globalized world with enhanced global integration via internationalized production chains and global trade, political changes in individual countries, in particular when they have a significant importance like the US, will have an impact on global financial markets. Emerging economies benefited from globalisation over the last two decades. This is why EM investors are closely watching the policies coming from Washington as there is a degree of nervousness caused by Trump’s anti-globalisation rhetoric.

- The start of the year in the EM Eurobond market was controversial. When many players were expecting further outflow of capital into risk free assets, the market unexpectedly posted rapid growth. What is the reason for such performance, in your opinion? How long will it continue?

After the election of Donald Trump to become the 45th President of the United States there was a short phase of nervousness from EM investors which led to a period of outflows from the asset class. The main concern was Trump’s anti-globalisation, anti-free trade rhetoric and anticipated implications for EM economies if implemented as promised during the election campaign. After a period of nervousness market participants started to price a mitigated implementation of these policies and put more emphasis on the positive global growth impulse of Trump’s policy agenda. Furthermore, the Fed is expected to continue with its shallow rate hiking path in the absence of material inflation pressure. This led to a view of a global environment that supports spread asset classes and so EM fixed income benefitted accordingly. We expect the positive sentiment towards the asset class to persist over the coming months, although valuations are increasingly rich.

- The beginning of 2017 turned out to be one of the most active periods in the primary market for EM issuers over the past two years. Will this trend continue in the second half of the year? What are your expectations related to primary market deals in EM?

EM issuers used the strong start of the year to pursue their financing program for 2017 and opportunistically to pre finance where deemed suitable from a liability management perspective. We expect the strong pipeline to continue into the coming months. Overall, for this year we expect gross issuance from EM corporates to be slightly higher than in 2016 and from EM sovereigns to be slightly lower. That said, net financing from EM issuers will be significantly lower than last year predominantly due to a hefty amortization schedule. Consequently market technicals will be supportive in our opinion.

- How do you assess FI asset performance in EM in Q1? Did it live up to your expectations? Was there anything unexpected for you in Q1?

EM markets performed much stronger than expected by many market participants, including us. Year to date (YTD) inflows into EM fixed income funds supported market performance and helped to absorb the hefty supply schedule. Many EM investors went with high cash positions into the year and started to deploy them. Sentiment with regards to the impact of Trump’s policy implications on the US and global economy turned positive. Positive growth impulse is now the main focus and anti-free trade policies are expected to be much softer. Also, with US treasury yields moving sideways and the reflation trade put on the back burner, a bond market environment has been created that benefits spread asset classes.

- What investment idea would you call the best one based on 2016 results and why?

Being long in Russian and Brazilian issuers has been beneficial for our portfolios. The macroeconomic turnaround in these countries helped bond performance for issuers from these countries. Also having geared our portfolios towards corporates vs sovereigns was a beneficiary strategy. Finally, overweighting Latin America vs Asia was fruitful. The commodity price recovery supported this strategy.

- What investment idea would you bet on for next quarter? Which markets and sectors are undervalued and which are overvalued, in your opinion?

After the strong rally over recent months, EM hard currency bond spreads are tight, but there are differentiations. Selectivity remains key. EM investment grade sovereigns are particularly expensive, while investment grade and high yield corporates still offer pockets of value. We still see opportunities in oil and gas and energy names for example. Overall, our strategy is more defensive and we see performance predominantly coming from income return, less so from capital appreciation via spread compression.

- Latin America, Africa, Asia, and Eastern Europe: What investment geography do you prefer? What regions should be avoided, in your opinion?

We still see value in Latin America. Eastern Europe is a region we like as well. In particular here we prefer corporates over sovereigns, the latter trading with very tight spreads. Asia fixed income remains expensive overall and we expect this region to be vulnerable to potential US Treasury yield increases. Selectively we see value in frontier markets, although we keep in mind the poor liquidity in many of these issuers.
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