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:

  1. local interest rates (which can provide returns from carry1 and capital gains);
  2. foreign exchange (i.e., returns from short-term carry and capital gains as local currencies fluctuate against the U.S. dollar); and
  3. 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.

For more, listen to Episode 31 of our World Financial Podcast, Income Across Borders.

  1. ^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.