The last Federal Reserve rate hike was bad for emerging market bonds, but this time is different, said Simon Lue-Fong, portfolio manager for the Pictet Global Emerging Markets Bond Fund. “The difference is last time the market expected the start of a cycle, and what was envisaged was perhaps a longer horizon of rate hikes,” said Lue-Fong. “This time the market is increasingly pricing for a short cycle, and therefore we do not believe the next rate will be as disruptive. In fact, it could be one more and done.” Pictet also sub-advises on a U.S. traded version of the fund. The Ivy Emerging Markets Local Currency Debt Fund is up 14% thus far in 2016, according to Morningstar. The $48 million fund has returned 11.5% in the past 12 months, putting it in the 81st percentile in Morningstar’s emerging markets bond category. Looking ahead to 2017, Lue-Fong said the big gains this year would be hard to replicate next year. “If you break down where this return came from, all the engines were firing,” said Lue-Fong. “Moving forward over the next 12 months, you will get your great carry of 6.15%, but local rates and FX have moved a lot and therefore we have to be more modest in our expectations, perhaps we need to be prepared for 6% to 9%, which is still great in a low yielding world.” Lue-Fong said growth has been a big worry for EM and will continue to be. The good news is that growth has now stabilized and is not moving lower, in his view. “We need to watch this closely, but things appear better than they have since 2012 when EM nominal exports collapsed which led to the deterioration in growth,” said Lue-Fong, adding that political risk is subsiding in Latin America which could lead to a pick-up in investment, even in depressed Venezuela. “We are overweight Venezuela because we believe political change could happen in next 12 to 24 months,” said Lue-Fong. “They have reached a breaking point which will entail political change.”
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