Amundi Asset Management portfolio manager Sergeï Strigo discusses his investment strategy for emerging market debt and how to mitigate risk amid the tempestuous political climate of 2017
For Sergei Strigo, head of emerging debt and currency at Amundi Asset Management, monitoring the globe’s central banks is a key part of the job. Presently, there is a real divergence on monetary policy between the United States and the other developed nations. As Strigo explains, however, there are powerful forces in the US that appear to be pulling in opposite directions on this issue.
“The market expectation at the moment is that there will be two rate hikes this year, but there are significant uncertainties with regard to the policies of the US administration,” he says. “On one side we have fiscal stimulus, which is pro-growth, and on the other side you have a tightening of interest rates, which is negative for growth.”
Despite lots of fiery rhetoric, it remains to be seen just how protectionist the policies of Donald Trump will ultimately be. This could influence the Fed’s direction, too, Strigo says.
“There is uncertainty for trade relationships and agreements like NAFTA. It is difficult to know what impact that will have on the US economy. If it is not managed properly, the impact will be quite negative. That will put into question the whole idea of tightening monetary policy.”
In much of the rest of the developed world, interest rates remain at record lows, a phenomenon Strigo believes will continue for some time yet. “The US is really the only market in the developed world that has somewhat adjusted,” he says. “The other countries in the Eurozone or Japan are still in an environment of historically low rates. That’s unlikely to change in 2017.”
The European Central Bank in particular seems reluctant to raise rates, given the economic and political turmoil on the continent – first Brexit, and now upcoming elections in France and Italy.
“There has been a decrease in purchases by the European Central Bank, and there is a lot of talk about potential tapering,” Strigo says. “You have to take this in context of all the risk in Europe currently. Brexit is a risk we don’t have a lot of clarity about – how and when it is going to happen. A form of hard Brexit points to a negative economic impact.”
Emerging markets to watch
Strigo is a Russian national who began his financial career in Canada, and now works for a French asset manager at its UK headquarters. As such, he has racked up more air miles than most, developing a keen sense for geopolitics in the process. That’s vital for his current role with Amundi, as well as with Mississauga-based Excel Funds, where he serves as portfolio manager for the firm’s High Income Fund.
The fund is made up of sovereign and corporate bonds in emerging markets, as well as a diverse mix of currencies. In terms of his investment strategy for 2017, Strigo takes very seriously the prospect of Washington sparking a series of trade wars – but he acknowledges that not all countries would be equally affected.
“Overall we are more cautious on countries that are major exporters to the US, especially in manufactured goods,” he says. “On the other side are countries that are commodity exporters – Brazil and Russia, for example – they should do significantly better. In both those countries, direct trade with the US is actually quite small.”
When it comes to fixed income, political uncertainty made 2016 a particularly volatile year for bonds. That climate has continued into 2017, so Strigo highlights a safer place to
for bond exposure in emerging markets.
“US-dollar-denominated government bonds are the most defensive asset class,” he
says. “There is no currency risk, per se, and volatility is significantly lower. The credit spreads are tighter compared to pre-Trump election, so this is recognized as a safer asset class in the emerging market debt space.”
In the EM private space, the majority of corporate bonds issued are for governmentowned companies, offering greater security. As Strigo explains, however, it is becoming more commonplace for these businesses to seek funding closer to home.
“Corporate bonds are a similar asset class to US-denominated sovereign debt,” he says. “One thing to watch out for is the overall level of corporate debt, which has been increasing for several years. In general, the issuance of corporate bonds in hard currencies is decreasing over the last year as more corporates are borrowing domestically in local currencies.”
Although finding yield in the bond space has become increasingly difficult, it is still achievable with the right research and an ability to think globally. Strigo highlights two countries that experienced plenty of domestic turmoil last year, but offered decent returns on their government bonds.
“Brazil’s central bank has already cut interest rates by 100 basis points over the past few months, and we see them cutting even more,” he says. “Brazilian bonds are still double-digit yields, close to 11%; we think that will go into the single digits this year. Russian bond yields are just above 8%.”
The shifting sands of currency
Currency is another area of expertise for Strigo, but it’s an area where investors need to tread carefully. Again, the potential impact of a capricious US government means taking a strong position on currency is a risk.
“We are more cautious on the currency side because there is significant uncertainty regarding the path of the US dollar,” he says. “What we are seeing now is that the market is starting to question whether this strong dollar environment will persist. This is helped partly by remarks we have seen from Trump and his treasury officials, saying they don’t want a strong dollar.”
In terms of emerging markets, Strigo looks at a specific set of criteria before taking a position on a local currency.
“What we like are countries where inflation is coming down and central banks are cutting interest rates,” he says. “Last year this trend was much more pronounced across the board in emerging markets. In 2017, it is less so. The two countries we like the most in this space are Brazil and Russia. You can also talk about Indonesia and India in the same context.”
“The market expectation at the moment is that there will be two rate hikes this year, but there are significant uncertainties with regard to the policies of the US administration,” he says. “On one side we have fiscal stimulus, which is pro-growth, and on the other side you have a tightening of interest rates, which is negative for growth.”
Despite lots of fiery rhetoric, it remains to be seen just how protectionist the policies of Donald Trump will ultimately be. This could influence the Fed’s direction, too, Strigo says.
“There is uncertainty for trade relationships and agreements like NAFTA. It is difficult to know what impact that will have on the US economy. If it is not managed properly, the impact will be quite negative. That will put into question the whole idea of tightening monetary policy.”
In much of the rest of the developed world, interest rates remain at record lows, a phenomenon Strigo believes will continue for some time yet. “The US is really the only market in the developed world that has somewhat adjusted,” he says. “The other countries in the Eurozone or Japan are still in an environment of historically low rates. That’s unlikely to change in 2017.”
The European Central Bank in particular seems reluctant to raise rates, given the economic and political turmoil on the continent – first Brexit, and now upcoming elections in France and Italy.
“There has been a decrease in purchases by the European Central Bank, and there is a lot of talk about potential tapering,” Strigo says. “You have to take this in context of all the risk in Europe currently. Brexit is a risk we don’t have a lot of clarity about – how and when it is going to happen. A form of hard Brexit points to a negative economic impact.”
Emerging markets to watch
Strigo is a Russian national who began his financial career in Canada, and now works for a French asset manager at its UK headquarters. As such, he has racked up more air miles than most, developing a keen sense for geopolitics in the process. That’s vital for his current role with Amundi, as well as with Mississauga-based Excel Funds, where he serves as portfolio manager for the firm’s High Income Fund.
The fund is made up of sovereign and corporate bonds in emerging markets, as well as a diverse mix of currencies. In terms of his investment strategy for 2017, Strigo takes very seriously the prospect of Washington sparking a series of trade wars – but he acknowledges that not all countries would be equally affected.
“Overall we are more cautious on countries that are major exporters to the US, especially in manufactured goods,” he says. “On the other side are countries that are commodity exporters – Brazil and Russia, for example – they should do significantly better. In both those countries, direct trade with the US is actually quite small.”
When it comes to fixed income, political uncertainty made 2016 a particularly volatile year for bonds. That climate has continued into 2017, so Strigo highlights a safer place to
for bond exposure in emerging markets.
“US-dollar-denominated government bonds are the most defensive asset class,” he
says. “There is no currency risk, per se, and volatility is significantly lower. The credit spreads are tighter compared to pre-Trump election, so this is recognized as a safer asset class in the emerging market debt space.”
In the EM private space, the majority of corporate bonds issued are for governmentowned companies, offering greater security. As Strigo explains, however, it is becoming more commonplace for these businesses to seek funding closer to home.
“Corporate bonds are a similar asset class to US-denominated sovereign debt,” he says. “One thing to watch out for is the overall level of corporate debt, which has been increasing for several years. In general, the issuance of corporate bonds in hard currencies is decreasing over the last year as more corporates are borrowing domestically in local currencies.”
Although finding yield in the bond space has become increasingly difficult, it is still achievable with the right research and an ability to think globally. Strigo highlights two countries that experienced plenty of domestic turmoil last year, but offered decent returns on their government bonds.
“Brazil’s central bank has already cut interest rates by 100 basis points over the past few months, and we see them cutting even more,” he says. “Brazilian bonds are still double-digit yields, close to 11%; we think that will go into the single digits this year. Russian bond yields are just above 8%.”
The shifting sands of currency
Currency is another area of expertise for Strigo, but it’s an area where investors need to tread carefully. Again, the potential impact of a capricious US government means taking a strong position on currency is a risk.
“We are more cautious on the currency side because there is significant uncertainty regarding the path of the US dollar,” he says. “What we are seeing now is that the market is starting to question whether this strong dollar environment will persist. This is helped partly by remarks we have seen from Trump and his treasury officials, saying they don’t want a strong dollar.”
In terms of emerging markets, Strigo looks at a specific set of criteria before taking a position on a local currency.
“What we like are countries where inflation is coming down and central banks are cutting interest rates,” he says. “Last year this trend was much more pronounced across the board in emerging markets. In 2017, it is less so. The two countries we like the most in this space are Brazil and Russia. You can also talk about Indonesia and India in the same context.”
