Venezuelan Bonds Alluring to BlueBay as Political Stress Mounts

  • Argentina and Brazil bonds will outperform in second half
  • Latin America a ‘better place’ for investors than a year ago

Venezuelan bond prices are too attractive to pass up as the country’s dire economic situation will eventually result in reforms that bolster its finances, according to BlueBay Asset Management.

“Valuations are still cheap for a country that has the largest oil reserves in the world and, under better economic management, would be able to comfortably service that debt,” said Graham Stock, the head of emerging-market sovereign research in London at BlueBay, whose flagship fund for developing-nation bonds beat 88 percent of its peers over the past year. BlueBay is a unit of Royal Bank of Canada.

The sustained drop in global oil prices has thrown Venezuela into turmoil, and swaps traders are pricing in a 92 percent chance of default over the next five years as Goldman Sachs Group Inc. says the country is in a “depression” and showing signs of hyperinflation. As political tension increases and protests erupt over food shortages, Stock says he’s betting that policy makers will eventually take steps to normalize the economy. Even if there’s a default, recovery values for the bonds exceed current price levels, according to Stock, who helps manage $16 billion in emerging-market assets.

A default “would be such a catastrophic development for the country as a whole that it would likely be accompanied by regime change and a better mix of policies going forward,” he said in an interview.

For the full Q&A with Stock, click here to read the Bloomberg Brief.

Stock said a proposal for the state oil company to swap bonds that come due in the next few years for notes with longer maturities would make it easier for the country to service its debt. Stock, who holds securities from state-owned Petroleos de Venezuela SA, said he would consider participating in the deal as long as it offered favorable terms on a net-present-value basis.

Bonds from Ecuador, another oil-dependent economy in South America, also appeal to Stock. He says the relatively small amount of debt coming due over the next few years and evidence that the government has been able to invest in improving the country’s infrastructure are positive signals for bondholders.

Overall, Latin America is a “better place” for investors today than it was 12 months ago, Stock said, citing political and fiscal initiatives in Argentina ushered in by President Mauricio Macri since he took office in December, and the beginning of similar changes in Brazil under acting President Michel Temer.

In Argentina, it’s “increasingly apparent that the government is trying to deliver on the commitments it made at the start of its term to do things differently,” he said. He expects Argentina’s sovereign bonds to outperform during the rest of the year, and says provincial notes offer an attractive yield premium.

Brazil’s bonds have room for gains in the second half of the year, after the country’s economic slump hit a bottom in the first quarter, he said. Temer will begin to deliver on efforts to shore up the country’s budget and drive investment into infrastructure that will boost growth, Stock said.

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