CLOSE

We permit the publication of our auditors’ report, provided the report is published in full only and is accompanied by the full financial statements to which our auditors’ report relates, and is only published on an access-controlled page on your website https://www.hermes-investment.com, to enable users to verify that an auditors’ report by independent accountants has been commissioned by the directors and issued. Such permission to publish is given by us without accepting or assuming any responsibility or liability to any third party users save where we have agreed terms with them in writing.

Our consent is given on condition that before any third party accesses our auditors’ report via the webpage they first document their agreement to the following terms of access to our report via a click-through webpage with an 'I accept' button. The terms to be included on your website are as follows:

I accept and agree for and on behalf of myself and the Trust I represent (each a "recipient") that:

  1. PricewaterhouseCoopers LLP (“PwC”) accepts no liability (including liability for negligence) to each recipient in relation to PwC’s report. The report is provided to each recipient for information purposes only. If a recipient relies on PwC’s report, it does so entirely at its own risk;
  2. No recipient will bring a claim against PwC which relates to the access to the report by a recipient;
  3. Neither PwC’s report, nor information obtained from it, may be made available to anyone else without PwC’s prior written consent, except where required by law or regulation; and
  4. PwC’s report was prepared with Hermes Property Unit Trust's interests in mind. It was not prepared with any recipient's interests in mind or for its use. PwC’s report is not a substitute for any enquiries that a recipient should make. The financial statements are as at 25 March 2016, and thus PwC’s auditors’ report is based on historical information. Any projection of such information or PwC’s opinion thereon to future periods is subject to the risk that changes may occur after the reports are issued and the description of controls may no longer accurately portray the system of internal control. For these reasons, such projection of information to future periods would be inappropriate.
  5. PwC will be entitled to the benefit of and to enforce these terms.
I accept
CLOSE

1. Select your country

  • United Kingdom
  • Austria
  • Australia
  • Belgium
  • Denmark
  • Finland
  • France
  • Germany
  • Iceland
  • Ireland
  • Italy
  • Luxembourg
  • Netherlands
  • Norway
  • Singapore
  • Spain
  • Sweden
  • Switzerland
  • USA
  • Other

2. Select your investor type

  • Financial Advisor
  • Discretionary Investment Manager
  • Wealth Manager
  • Family Office
  • Institutional Investor
  • Investment Consultant
  • Charity, Foundation & Endowment Investor
  • Retail Investor
  • Press
  • None of the above

3. Accept our terms and conditions

Proceed

The Hermes Investment Management website uses cookies to remember your preferences and help us improve the site.
By proceeding, you agree to cookies being placed on your computer.
Read our privacy and cookie policy.

Fewer bargains left in fashionable emerging market debt

Home / Press centre / Fewer bargains left in fashionable emerging market debt

Fraser Lundie, CFA, Co-Head of Credit and Senior Credit Portfolio Manager
08 September 2016
Press

Fraser Lundie, Co-Head of Credit and Andrey Kuznetsov, Senior Credit Analyst at Hermes Investment Management discuss the outperformance of emerging market debt this year, but warn that a selective approach is required from here.

Global high yield managers have this year been able to enjoy a significant tailwind from their allocation to regions outside of the US and Europe. Emerging market corporate bonds have undergone a remarkably rapid transformation from one of the least-loved asset classes to perhaps the most popular. This move has been driven by several factors.

First of all, a major tailwind has been the relative attractiveness of emerging market debt compared to developed market fixed income, where close to half of the market yields below 1%. Secondly, the year-to-date stabilisation in many commodity markets has provided relief for many emerging market economies that rely on these exports for a substantial part of their GDP. And thirdly, the expectations of a lower-for-longer interest rate environment and a weaker dollar has helped emerging market currencies recover.

As a result inflows into emerging market hard currency funds continued, pushing year-to-date cumulative flows to $12bn, or 9% of their current AUM. Issuance has picked up recently but remains at its lowest level in the last four years, aiding the supply-demand technical which remains very supportive.

Along the way, we have been exercising our global remit to find opportunities which stand out in comparison to developed market peers. We have invested in global players with strong fundamentals and underappreciated recovery stories such as steel players Severstal and Gerdau, in Russia and Brazil respectively.

Severstal
Severstal benefits from a strong asset base with low costs and proximity to infrastructure for export, combined with a conservative financial policy. As a result, even in volatile times for the global steel markets and during a recession in the Russian domestic market, the business has managed to significantly improve its credit profile (see graph below), leading to its recent upgrade to investment grade by S&P.

Graph: Severstal has improved its credit profile in the past 2 years

sep-16-credit-bar-chart-1

Source: Hermes Credit, Company reports

Gerdau

Gerdau has a globally diversified business with a very strong market position in its largest market, Brazil. Its business is mainly made up of minimill-based assets (more flexible than blast furnaces and able to process scrap metal as well as pig iron) and it has historically maintained bondholder-friendly behaviour including raising equity, tendering for bonds and not raising new debt in the past two years.

Increase vigilance and move up in quality
Valuations have now largely normalised despite the risks still remaining – primarily a renewed declining of the oil price and other majority commodities prices. Indeed, a Fed rate hike and geopolitical risks also remain as potential deterrents to continued outperformance. It is essential to combine a thorough assessment of operating, financial and ESG risks to identify companies that are able to prosper in an environment where many emerging market economies are still struggling to return to growth.

A return to fair value compels us to remain up in quality and highly selective as the low-hanging fruit of the trend is now behind us. That said, given the siren call for yield persists, and the exogenous catalysts of the BoE and ECB programmes are expected to endure, it is more important than ever to fully exploit flexible, global mandates to eke out returns where risk is deemed appropriate.

Graph: EM’s strong performance this year

sep-16-credit-line-chart-1

Source: Hermes Credit, Bloomberg

 

 

 

Share this post:
Fraser Lundie CFA, Co-Head of Credit and Senior Credit Portfolio Manager Fraser joined Hermes in February 2010 and is lead manager on the Hermes range of Credit strategies and co-head of credit. Prior to this he was at Fortis Investments, where he responsible for Euro High Yield.  Fraser graduated from the University of Aberdeen with an MA (Hons) in Economics and earned an MSc in Investment Analysis from the University of Stirling. He is a CFA® charterholder and member of the Association for Investment Management and Research (AIMR), having gained the UKSIP Level 3 Certificate in Investment Management (IMC). In 2013, Fraser featured  in Financial News’s ‘40 Under 40 Rising Stars of Asset Management’, an editorial selection pick of the brightest up-and-coming men and women in the industry, and in January 2015, Fraser was named as one of the top 10 star fund managers of tomorrow by The Daily Telegraph. CFA® is a trademark owned by the CFA Institute.
Read all articles by Fraser Lundie

Find posts by author

Find posts by category

  • Select category
  • business development
  • company news
  • report

Press contacts