(Bloomberg) — There’s no immediate end in sight for bond investors getting tugged between risk-on rallies and selloffs that rekindled nightmares of the 2013 taper tantrum, according to the world’s largest money manager.
Sergio Trigo Paz, the London-based head of emerging-market debt at BlackRock Inc., said he’s bracing for a repeat of January and February, when developing-nation assets vacillated from several weeks of a “Goldilocks scenario” to several weeks of turmoil fueled by a spike in U.S. Treasury yields.
“It’s like a half-pipe,” or u-shaped chute used by snowboarders to perform jumps, said Trigo Paz, who practices the sport in the Swiss Alps in his spare time. “It’s counter-intuitive, but at the moment of most Goldilocks you have to sell risk and at the moment of greatest taper you need to buy.”
BlackRock is among a cadre of investors and strategists from Ashmore Group Plc to Morgan Stanley who say that emerging-market bonds won’t suffer the same fate as in 2013, even after enduring their worst week since September.
There are several notable differences, said Trigo Paz. For one, the asset class isn’t the crowded trade it was back then. Secondly, the economic fundamentals in the so-called Fragile Five, which suffered the most eight years ago, have generally improved. Meantime, fiscal stimulus will drive demand for commodities, oil prices may climb and the U.S. dollar could weaken, he said.
With that backdrop, Trigo Paz said he’s betting on high-yield bonds from oil exporters like Angola, Gabon and Russia against their counterparts in Argentina and Ecuador, which both underwent debt restructurings last year. He also favors South Africa over Brazil, Mexico over Colombia and Poland over its regional peers. Another strategy is to buy developing-nation currencies, funded with the U.S. dollar, Japanese yen, euro or Swiss franc.
Trigo Paz helps oversee portfolios including the $1.6 billion BlackRock Strategic Funds – Emerging Markets Flexi Dynamic Bond Fund. It has returned 8.1% in the past year, bettering 95% of peers. The fund has an annualized return of 6% over the last half decade, which is better than 78% of its counterparts.
“Last year, we went through a very, very violent hurricane hitting all countries,” he said. “The fragile countries either defaulted or restructured. All the others went through a crash test and either made it, are still struggling or are in a better position today. In the next year, the jury will be out for most.”