T. Rowe Price: Emerging Local Markets Bond Strategy

Andrew Keirle, Portfolio Manager

How cheap are valuations in EM local currency debt today?

After the recent underperformance we’ve seen in emerging market local currency debt, valuations are very cheap. Yields at the index level are about 6½% and on my strategy north of 7%. Which for an investment grade, five-year duration asset is extremely attractive we think, particularly for European investors where yields are extremely low and durations are very long. In addition to which, currencies are very cheap, having sold off with the strength of the dollar we’ve seen over the last six to nine months. We think the dollar is expensive and therefore EM currency should outperform over the medium term providing a solid support for performance.

Are you worried about contagion from troubled countries like Turkey and Argentina?

We’ve already seen contagion from the concerns in Turkey and Argentina bleeding through into other parts of the asset class, and that’s been one of the main drivers for the underperformance this year. But they’re very idiosyncratic stories. Both had inappropriate policies and valuations weren’t attractive to incentivise an inward investment from international investors. In terms of going forward though, we think that some of the necessary changes to macro policy is coming through in both countries. IMF support in Argentina should support the longer-term improvement of the story and in Turkey we are seeing an adjustment of interest rates which is important in terms of re-establishing confidence and dealing with their long-term inflationary problems. So we have seen contagion already, but as a result of that that’s meant a lot of countries that are good in emerging markets have good value opportunities and good fundamentals have been hurt and those present opportunities.

Where do you see opportunity at the moment?

One of the biggest opportunities for us from a fundamental point of view is some of the central and eastern European countries. The currencies are relatively cheap. The external situation is positive and growth is improving. They look attractive, particularly when you consider the euro, the currencies to which they are closely aligned, is relatively cheap. So that’s one area that’s attractive. Elsewhere, with the election in Brazil, valuations have got very cheap. The market has decided that rate hikes needs to be significantly priced in and we think those are unlikely to come through. So a positive result on Brazil will be supportive for yields.

What advice do you have for investors in EM local currency debt?

There are a number of considerations to make when investing in emerging market local currency debt. First of all valuations particularly for UK and European investors is very attractive, given the way the yields are and where currency values are. Secondly it’s important to realise just how much volatility there is in currency and try and deal with that through relative value, opportunities, so looking to reduce the directional risk in currency, and secondly taking a longer-term view. This is an asset class that has high yield and high coupon which over time drives the returns. Currency often drives the volatility. So if one can use a relative value strategy in many cases to try and limit that sort of risk and that sort of drawdown risk to capital, it results in a better outcome for the client.

Risks - the following risks are materially relevant to the strategy:

China Interbank Bond Market risk - market volatility and potential lack of liquidity due to low trading volume of certain debt securities in the China Interbank Bond Market may result in prices of certain debt securities traded on such market fluctuating significantly.

Country risk (China) - all investments in China are subject to risks similar to those for other emerging markets investments. In addition, investments that are purchased or held in connection with a QFII licence or the Stock Connect program may be subject to additional risks.

Country risk (Russia and Ukraine) - in these countries, risks associated with custody, counterparties and market volatility are higher than in developed countries.

Credit risk - a bond or money market security could lose value if the issuer's financial health deteriorates.

Currency risk - changes in currency exchange rates could reduce investment gains or increase investment losses.

Default risk - the issuers of certain bonds could become unable to make payments on their bonds.

Derivatives risk - derivatives may result in losses that are significantly greater than the cost of the derivative.

Emerging markets risk - emerging markets are less established than developed markets and therefore involve higher risks.

Frontier markets risk - small market nations that are at an earlier stage of economic and political development relative to more mature emerging markets typically have limited investability and liquidity.

High yield bond risk –a bond or debt security rated below BBB- by Standard & Poor’ or an equivalent rating, also termed below investment grade’ is generally subject to higher yields but to greater risks too.

Interest rate risk - when interest rates rise, bond values generally fall. This risk is generally greater the longer the maturity of a bond investment and the higher its credit quality.

Issuer concentration risk - to the extent that a portfolio invests a large portion of its assets in securities from a relatively small number of issuers, its performance will be more strongly affected by events affecting those issuers.

Liquidity risk - any security could become hard to value or to sell at a desired time and price.

Sector concentration risk - the performance of a portfolio that invests a large portion of its assets in a particular economic sector (or, for bond portfolios, a particular market segment), will be more strongly affected by events affecting that sector or segment of the fixed income market.


General Portfolio Risks

Capital risk - the value of your investment will vary and is not guaranteed. It will be affected by changes in the exchange rate between the base currency of the portfolio and the currency in which you subscribed, if different.

Counterparty risk - an entity with which the portfolio transacts may not meet its obligations to the portfolio.

Geographic concentration risk - to the extent that a portfolio invests a large portion of its assets in a particular geographic area, its performance will be more strongly affected by events within that area.

Hedging risk - a portfolio's attempts to reduce or eliminate certain risks through hedging may not work as intended.

Investment portfolio risk - investing in portfolios involves certain risks an investor would not face if investing in markets directly.

Management risk - the investment manager or its designees may at times find their obligations to a portfolio to be in conflict with their obligations to other investment portfolios they manage (although in such cases, all portfolios will be dealt with equitably).

Operational risk - operational failures could lead to disruptions of portfolio operations or financial losses.

Important information

This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.

It is not intended for distribution to retail investors in any jurisdiction.

EEA—Issued in the European Economic Area by T. Rowe Price International Ltd, 60 Queen Victoria Street, London EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. For Professional Clients only.

Switzerland—Issued in Switzerland by T. Rowe Price (Switzerland) GmbH, Talstrasse 65, 6th Floor, 8001 Zurich, Switzerland. For Qualified Investors only.

T. ROWE PRICE, INVEST WITH CONFIDENCE and the Bighorn Sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc. All rights reserved.



Latest Date Range
Audience for the document: Share Class: Language of the document:
Download Cancel


Share Class: Language of the document:
Download Cancel
Sign in to manage subscriptions for products, insights and email updates.
Continue with sign in?
To complete sign in and be redirected to your registered country, please select continue. Select cancel to remain on the current site.
Continue Cancel
Once registered, you'll be able to start subscribing.

By clicking the Continue button, I acknowledge that I have read and accepted the Privacy Notice

Continue Back

Change Details

If you need to change your email address please contact us.
You are ready to start subscribing.
Get started by going to our products or insights section to follow what you're interested in.

Products Insights

GIPS® Information

T. Rowe Price ("TRP") claims compliance with the Global Investment Performance Standards (GIPS®). TRP has been independently verified for the twenty one- year period ended June 30, 2017 by KPMG LLP. The verification report is available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm's policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation.

TRP is a U.S. investment management firm with various investment advisers registered with the U.S. Securities and Exchange Commission, the U.K. Financial Conduct Authority, and other regulatory bodies in various countries and holds itself out as such to potential clients for GIPS purposes. TRP further defines itself under GIPS as a discretionary investment manager providing services primarily to institutional clients with regard to various mandates, which include U.S, international, and global strategies but excluding the services of the Private Asset Management group.

A complete list and description of all of the Firm's composites and/or a presentation that adheres to the GIPS® standards are available upon request. Additional information regarding the firm's policies and procedures for calculating and reporting performance results is available upon request

Other Literature

You have successfully subscribed.

Notify me by email when
regular data and commentary is available
exceptional commentary is available
new articles become available

Thank you for your continued interest