Top Bond Guru Pulls Back From Brazil and Heads to Africa

(Bloomberg) -- One of the top investors in emerging-market bonds is putting his money in Africa.

Stone Harbor Investment Partners's Jim Craige, who manages the world's best-performing fund this year, is buying dollar-denominated debt from Angola, Ghana, Gabon, Ivory Coast and Zambia, while paring holdings from Brazil and Mexico. He says sub-Saharan countries were unfairly punished in 2016 and now present the best value in developing nations.

After a multi-year rally sent emerging-market bond gauges to record highs this month, investors are looking to riskier credits from lesser-known debtors to juice returns. While countries like Angola and Zambia don't have the on-time payment track records of more established counterparts in Latin America, their sovereign dollar notes yield about 7.3 percent, almost twice the rate for Mexico's debt and three percentage points above Brazil's.

"It was tough to find sponsorship for owning a lot of these names," said Craige. His Emerging Markets Total Income Fund and Emerging Markets Income Fund delivered the top two returns this year as of Sept. 22 out of 229 emerging-market hard-currency debt funds with at least $100 million in assets that report performance to Bloomberg. “But we thought they were very attractive.”

Overweight positions in Brazil, Mexico and Argentina helped lift the net asset value return on Craige's total income fund, which invests in both sovereign and corporate notes, to 19 percent this year. But now he says prices are stretched, particularly in Brazil and Mexico sovereigns. He's kept a sizable holding of Argentina's euro-denominated government bonds and smaller positions in Petroleo Brasileiro SA, Cemex SAB and Petroleos Mexicanos hard-currency notes.

“We have gone from a very large overweight to more modest overweight,” he said.

The sub-Saharan countries Craige is targeting have lower credit ratings than Brazil or Mexico and face significant domestic challenges. Angola, Africa's second-biggest oil exporter, suffers from a shortage of hard currency and growing debt levels after the sharp drop in crude prices. Ghana is in the midst of an International Monetary Fund program and Zambia is negotiating one. Even Ivory Coast, which is considered the safest country with a rating just one step below Brazil, had a series of mutinies by soldiers this year. 

Craige says the higher yields are worth the greater risk. He sees commodity prices as unlikely to fall much further, and expects the IMF to support countries that require its guidance. Furthermore, the cash flow needs of these countries are relatively low for the region and indicate they should have no problem making good on their obligations.

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But the best reason to hold these countries' debt, he says, comes from the positive external backdrop: Namely, emerging markets are just in the beginning of a bull-market cycle, so it makes sense to pick the ones with the best yields. Stone Harbor forecasts developing economies will expand about 5 percent this year; that compares with a median forecast of 2 percent for Group of 8 countries, according to estimates compiled by Bloomberg.

“The underlying fundamentals are improving significantly in emerging markets,” Craige said.

The MSCI Emerging Markets Currency Index dropped 0.4 percent at 2:13 p.m. in New York, extending a two-day decline.

--With assistance from Paul Wallace Andrew Bachmann and Dana El Baltaji

To contact the reporter on this story: Aline Oyamada in Sao Paulo at aoyamada3@bloomberg.net.

To contact the editors responsible for this story: Rita Nazareth at rnazareth@bloomberg.net, Jeremy Herron at jherron8@bloomberg.net, Brendan Walsh