In a world awash with negative yields, some of the savviest bond investors in emerging markets look at today's wars, riots and even the candidacy of Donald Trump as rare money-making opportunities.
Goldman Sachs Asset Management's Sam Finkelstein says crisis-riven Venezuela's state oil champion is a good bet even though it risks defaulting. He's bullish on Mexico, where the peso has rallied as Trump's chances of winning the U.S. presidency have waned. Yerlan Syzdykov of Pioneer Investment Management sees value in Turkey, which is reeling from a coup attempt, terrorist bombings, military action in Syria and two junk ratings.
More investors are hunting for higher returns in some of the world's most turbulent markets as central bank efforts to revive growth in developed nations from Japan to Germany push the amount of negative-yielding bonds to a record $11.6-trillion (U.S.). The global savings glut has triggered a net inflow into emerging-market bond funds -- $43.5-billion so far this year -- for the first time since 2012, according to EPFR Global.
"Any sign of volatility is an opportunity to continue gaining exposure to the market," said Mr. Syzdykov, who's lured $1.4 billion of fresh capital into Pioneer's $4.2 billion Emerging Market Bond fund since January. "There's been a tremendous amount of tourist money making our market quite expensive."
Turkey and Mexico were the only countries in the Bloomberg Emerging Markets Sovereign Bond Index to miss out on a rally in the third quarter, when average yields fell to a near-three-year low of 4.25 per cent.
Turkish dollar debt declined 1.8 per cent in July through September, as President Recep Tayyip Erdogan declared a state of emergency and purged thousands from the civil service after surviving a deadly putsch attempt.
Mexico's bonds fell 0.4 in the same period, which saw Trump shore up the Republican nomination with pledges to build a wall to keep unwanted Mexicans out and to scrap the NAFTA trade accord that's tied Mexico to the U.S. and Canada since 1994. The peso, which hit a record low as Trump peaked in the polls last month, has since jumped about 5 percent amid a series of missteps.
While fresh sales from Mexico, China and Russia helped meet some of the demand last month, too much money is still chasing too few bonds, according to Finkelstein, who runs the $6.5 billion GS Emerging Markets Debt Portfolio. That makes even riskier markets like Venezuela, where the economy is in free-fall and bloody protests have erupted over food shortages, more attractive.
Mr. Finkelstein particularly likes bonds issued by the South American oil giant's largest company, Petroleos de Venezuela SA. PDVSA notes that mature in 2024, 2026 and 2037 are changing hands for less than 45 cents on the dollar.
"While a default is probably likely, the bonds are trading below where we think recovery would be in the event of a default," said Mr. Finkelstein. His fund has attracted $2.2-billion and outperformed 76 per cent of its peers this year.
For investors uncomfortable with political turmoil, the options are slim. Average cash holdings in emerging-market dollar funds climbed to 6.1 per cent in August, compared with a five-year average of 4.4 per cent, Morgan Stanley Research data show. The elevated levels are driven by inflows that "have not yet entirely been invested," the bank said in a note Sept. 28.
Sergey Dergachev, a senior money manager at Union Investment in Frankfurt, said his cash holdings are as high as 6 percent, double the normal average. He said that's partly because money is coming in faster than he can invest it, but it also reflects a "defensive stance" until the U.S. election is decided.
"There are big question marks about what will happen to global trade policies and U.S. foreign policy," Mr. Dergachev said.
While many investors see such uncertainties as warnings to be cautious, others such as Mr. Syzdykov and Mr. Finkelstein regard the market fluctuations that accompany those risks as invitations to buy.
"Bouts of volatility in the past few weeks have allowed us to pick up more exposure," Mr. Syzdykov said. "If we get a Trump victory, that could be seen as a negative for global trade and potentially that would be an opportunity."