If you can get past the headlines about NAFTA, Mexican border walls, and political chaos in Brazil, then as a fixed income market, Latin America definitely deserves a look. The biggest markets for bond investors have ample reserves to service their foreign debts and they have what Europe and the U.S. do not have much of: yield.
“We think to some extent a lot of the risk is attached to the potential of a trade war, especially with relation to Mexico. It’s possible, but not the baseline scenario,” says Sonal Desai Ph.D., SVP, Portfolio Manager and Director of Research at Franklin Templeton Investments’ Templeton Global Macro unit. She was interviewed in April by RIA Channel CEO Julie Cooling. For her, the market over-reacted on Mexico in particular. This was most notable in January, during the first month of President Donald Trump, when the Peso fell to its weakest level ever against the Dollar. It has since recovered from those lows. As recently as last week, long after Desai spoke with us, Brazil’s market fell by as much as 14% on news that it may yet lose another president to a corruption scandal. The market recovered most of those losses shortly after the knee-jerk reaction to the news.
“We see far more opportunity in Latin America,” she says. “The continent has gone through its most recent flirtation with populism, as opposed to the euro area and here in the U.S.” In the video, she singles out Brazil, Mexico and one other name that has been off most radars for some time.
Due to higher yield and the belief that Latin American currencies will eventually strengthen against the dollar, Templeton fund managers prefer the local currency debt over sovereign debt.
Desai co-manages the Morningstar five star rated Templeton Global Bond Fund (TGBAX 12.12 +0.06 +0.50%) and the Templeton Global Total Return Fund (TTRZX 12.29 +0.06 +0.49%). She is part of the Templeton Global Bond portfolio management team named Morningstar’s Fixed Income Manager of the Year in Canada in 2013. The Templeton Global Total Return Fund launched in 2008 and has posted an average annual total return of 8.66% from inception to the end of the first quarter. Its biggest weightings outside of cash (as of April 30) were Mexico and Brazil.
The Templeton Global Bond Fund was launched in September 1986. It’s generated an average annual total return of 7.8% since inception ending the first quarter 2017. Within its top 25 holdings as of March 31, Morningstar has listed Mexican 8.5% yielding bonds; Brazil 10% bonds and Indonesian debt yielding 8.35%.
In the video, Desai discusses some of the risks in global fixed income and explains how they pick their spots in emerging markets.