“If we take the view that oil prices have bottomed out in the 30s, you are getting a 10% yield on the currency, and if the currency then stays range bound, it is an attractive proposition. Am I going to have the rouble for two or three years from now? Who knows? Probably. I will be tactical in terms of trading some of the currency.”
Beware ‘blow ups’
Another driver that has helped performance into positive territory in a difficult market is avoiding what Calich calls “blow-ups in this part of the cycle”.
Blow-ups, or collapsing and defaulting bond prices, are a particular hazard as default rates are increasing, she says, not only in emerging markets but even US high-yield issues. “It is a combination of some of the weaker commodity producers, including oil, and some of the other weaker names.
“Last year, if you look at the performance draggers, there were a few countries that did quite poorly. Mongolia, for example, where I do not have exposure, was one of the worst performers. A string of sovereigns did quite poorly.
“You also had a few corporates that we did not have an exposure to, such as Brazilian construction companies and sugar companies, which blew up.”
One very good call Calich made, after taking an Easter holiday in Kiev last year, was on the Ukrainian hryvnia. War-torn Ukraine is perhaps not the most obvious holiday destination but she had been intrigued by what she had heard, and her curiosity, and willingness to carry out her own street-level research, paid off.
“At that time I was not aware of any investor trips, but by being on the street and observing what was going on, it gave me a sense of the currency. I was having meals for just €2-3, and it told me that the hryvnia had overshot and was not going to depreciate further.”
Highly recommended
Wanting to see how see how the Ukrainian people lived, she chose not to stay in a luxury hotel but a “Soviet-style tower block”.
Her visit, she says, informed her view that despite the difficulties with Russia, there was more upside than downside to the Ukrainian economy. Shortly after returning to London, she bought some bonds issued by Kiev.
The subsequent restructuring terms for these bonds turned out to be better than anybody expected but, she says, she is “humble enough to know those types of opportunities do not exist very often”.
In terms of credit ratings, the portfolio is clustered around BBB and BB territory, with relatively low exposure either side of that risk spectrum.
“It is more important to buy something that is stable or improving than something that is deteriorating. In other words, I would rather have a weak CCC or B that is improving, as opposed to having a BBB- or a BB that is deteriorating,” she says.
Forward view
The outlook for emerging market bonds in 2016 is more of the same, Calich says, as the challenges of the past few years are set to continue.
