Goldman Emerging Debt Fund Stays Bullish, Taps Venezuela

  • U.S. firm finds value in Venezuela, Dominican Republic bonds
  • Hard-currency debt preferred to local developing-nation bonds

Goldman Sachs Asset Management is betting a rally in emerging-market debt will last as global central banks pump cash into their economies, and is even turning to distressed Venezuelan bonds for greater returns.

Demand for emerging-market assets will be supported as the European Central Bank keeps monetary policy loose and after the U.S. Federal Reserve turned more “dovish,”  Owi Ruivivar, managing director in Singapore who helps oversee about $1 trillion for the Wall Street firm, said in an interview. International notes from developing nations are on track for their best performance in four years, while exchange rates are poised to snap three years of declines against the U.S. dollar.

“We have been incredibly constructive on emerging-market fixed income,” said Ruivivar, who co-manages the $5.7 billion GS Emerging Markets Debt Portfolio that has gained 13 percent in the past year, beating 92 percent of peers in data compiled by Bloomberg. “We’re in an environment where you’ve got liquidity for longer in the developed world.”

Developing nations offer yields that average almost nine times higher than advanced nations, their economies are growing at more than the double the pace and their political risks are now rivaled by European Union exit referendums and the U.S. presidential election. The Fed is more likely to raise interest rates toward the end of the year than at its next meeting in September, she said.

Goldman sees value in the bonds of Venezuela and the Dominican Republic and prefers hard-currency debt over domestic notes. Dollar debt issued issued by the two countries returned 26 percent and 16 percent respectively this year, indexes compiled by JPMorgan Chase & Co. show. 

Venezuela, which sits on the world’s largest oil reserves, has seen its economy deteriorate as prices for the commodity dropped and its own production hit a 13-year low. The cost of protecting its bonds against non-payment has fallen from a record high set in February as crude rebounded, based on credit-default swaps, according to data provider CMA. It’s 12.75 percent August 2022 bonds trade at about 51 cents on the dollar, up from as low as 34 in February.

The cash-strapped country, which has been on default watch for the past two years, has a good chance of getting through another year to honor its debt payments, according to Aberdeen Asset Management and JPMorgan.

Latin America

The Dominican Republic, an exporter of bananas, gold and coffee, is the fastest-growing Latin American country as lower oil prices boosted disposable incomes and a recovery in the U.S. helped tourism and remittance flows.

“We like Venezuela despite its fundamentals because we think that it’s cheap relative to its potential recovery rate,” said Ruivivar. The Dominican Republic “is one of those under-researched credits. It’s a more diversified economy.”

In the past three months, emerging-market sovereign dollar debt returned 6.4 percent, outpacing the 2.6 percent gain in developed markets, indexes compiled by Bloomberg show. They offer an average yield of 4.3 percent compared with 0.5 percent for advanced nations.

Institutional investors are more focused on those securities that are denominated in dollars, euros or yen.

“We like hard-currency debt where we find value that has not been factored in,” she said. “Emerging markets have outperformed developed markets and that can continue.”

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