(Bloomberg) -- Pavel Mamai notched up his sixth lossless year in 2020 thanks to emerging-market debt. With that rally stumbling, he's delving deeper into frontier markets in a bid to decouple from the global reflation trade.
The London-based founder of hedge fund ProMeritum Investment Management LLP is buying the junk-rated Eurobonds of oil producers Oman and Angola, which have rebounded from a pounding after last year's crude collapse. Helped by a big position in South African bonds, ProMeritum generated a 7.2% return last year, its sixth consecutive annual gain since its inception in 2015.
Mamai, who oversees nearly $400 million in emerging-market debt, is joining the hunt for assets that are less sensitive to core rates as bonds sell off around the world on signs inflation is returning. Oman is getting serious reining in spending after the oil price shock, while Angola is on track for budget surpluses and credit rating upgrades, he said.
“Oman was in a difficult situation, but authorities decided to take measures to cut spending,” Mamai said “It's no longer seen as a deteriorating story and soon it will start to be seen as an improving story.”
The largest oil exporter outside OPEC, the sultanate pays a higher premium to borrow in the dollar debt market than Senegal, Jordan and Turkey, according to Bloomberg Barclays indexes. The nation is seeking to win over investors concerned about its dwindling reserves by reducing spending and introducing a 5% value-added tax this year. Its dollar bonds have returned more than 1% this year.
Angola secured a temporary waiver in bilateral debt-service payments from the Group of 20 leading economies and the IMF increased the size of its loan to $4.5 billion last year. The African oil producer generated the fourth-best return on dollar debt in the developing world so far this year, after handing investors a more than 2% loss in 2020.
“The government's ongoing commitment to fiscal consolidation and debt sustainability should lead to budget surpluses and a faster pace of debt reduction,” Mamai said. Possible credit upgrades into the B range in 2022 “would allow a larger investor base to buy Angolan eurobonds and should become the final performance catalyst.”
Promeritum allocated a fifth of its money -- its biggest single holding -- to South African government bonds at a point last year when they were among the worst performers in emerging markets. The risk paid off -- the nation's local debt was the best performer among peers in the second half of the year, with a more than 25% return.
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