In this 31st episode of the OppenheimerFunds World Financial Podcast, Hemant Baijal, Portfolio Manager and Co-Head of the Global Debt Team, sat down for a wide-ranging discussion about his international bond strategy and the value of seeking returns from locally denominated bonds in emerging markets.
In this conversation, Baijal outlined the composition of returns from emerging market fixed income and described the so-called “three levers” he taps in his portfolio to extract returns:
- local interest rates (which can provide returns from carry1 and capital gains);
- foreign exchange (i.e., returns from short-term carry and capital gains as local currencies fluctuate against the U.S. dollar); and
- credit (i.e., the premiums extracted from the bonds in which his team invests).
Baijal believes that in the foreseeable future, a substantial share of positive absolute return in his funds will come from coupon income—the product of local interest rates and credit—which is generally higher in emerging markets.
He adds that the single biggest driver of returns from international bonds is capital flows and their impact on the dollar. Over the past few years, he says, we’ve seen a material improvement in the depth and breadth of global economic growth, as well as a shift in the leadership of that growth away from the United States to countries abroad. As part of that shift, multiple emerging markets—such as Brazil and Russia—have recovered substantially from their respective recessions. The result has been synchronized global growth. When the leadership of growth moves outside the United States, capital tends to follow—and, indeed, the dollar has been declining since 2015 as capital moved abroad. Baijal believes that the flow of capital to emerging markets has benefited—and will continue to benefit—the performance of international bonds.
- ^Carry is defined as the profit investors gain from selling a certain currency with a relatively low interest rate and using the funds to purchase a different currency yielding a higher interest rate.
Mutual funds and exchange traded funds are subject to market risk and volatility. Shares may gain or lose value.
Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes, regulatory and geopolitical risks. Emerging and developing market investments may be especially volatile. Fixed income investing entails credit and interest rate risks. Interest rate risk is the risk that rising interest rates or an expectation of rising interest rates in the near future will cause the values of a fund's investments to decline. When interest rates rise, bond prices generally fall, and a fund’s share prices can fall.
The mention of specific countries, currencies, securities, issuers or sectors does not constitute a recommendation on behalf of any fund or OppenheimerFunds, Inc.
OppenheimerFunds is not undertaking to provide impartial investment advice or to provide advice in a fiduciary capacity.
These views represent the opinions of the Portfolio Manager at OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.