Unlike its equity markets, Latin American bond markets been a relatively solid performer over much of the past decade.
As yields on developed market bonds dipped to all-time lows in the years following the financial crisis, investors turned to riskier, higher-yielding assets such as those in Latin America.
At present, yields on Brazilian 10-year government bonds yield more than 10 per cent, while Mexican government bonds yield 8.5 per cent. This is compared with around 1.5 per cent for 10-year UK gilts.
Moreover, with investment grade corporate issuers in the banking, commodities and utilities sectors, Latin American debt markets have proved to be a solid choice for investors.
While many countries in the region have faced a slew of economic challenges and ongoing political upheaval, the region’s bond market has continued to attract investors given favourable yields and improved fundamentals as both inflation and interest rates have fallen.
A down year
Despite several years of solid returns, 2018 has been a negative year for Latin American bonds in US dollar terms, with the JPMorgan EMBI Plus Latin America index falling by 7 per cent terms in the 12 months to September 30.
The positive news, however, is that Latin American debt has been a relative outperformer when compared to the broader emerging markets peer group.
Raphael Marechal, head portfolio manager for emerging markets at Nikko Asset Management, says emerging market bonds fell by more than 9 per cent in the first nine months of 2018.
“Latin America clearly outperformed with a special mention for Mexico, one of the strongest fixed income markets so far in 2018,” he notes.
“In local currency terms, all markets are positive, except for Peru. So clearly, the negative absolute performance is due to the strength of the US dollar and not to a weakness in Latin American markets.”
Current opportunities
With a weaker macroeconomic framework and the strong influence that politics plays in financial markets, investors in Latin America need to take a different approach than in other markets.
Wim Vandenhoeck, manager of the Emerging Markets Local Debt fund at Oppenheimer Funds, says the lack of structural, cyclical and institutional strength in the region create opportunities for investors.
“Latin America does not fare best of the regions in all these factors, hence politics in the region is a much stronger driver of asset valuations than elsewhere in emerging markets,” he says.
“Large lessons from macroeconomic instability crises of the past have been learned toward floating exchange rates, inflation targeting regimes and fiscal responsibility. However, in bad times, once vulnerabilities are exposed, the exchange rate is the key shock absorber, generating a background of high real rates and steep yield curves.”
For Mr Marechal at Nikko Asset Management, Mexico is a particularly attractive market in the region.
