Here’s a tip from the world’s biggest money manager on investing in emerging markets: avoid knee-jerk reactions to political headlines.
Here’s a tip from the world’s biggest money manager on investing in emerging markets: avoid knee-jerk reactions to political headlines. Gerardo Rodriguez, the former Mexican deputy finance minister who now manages $300 million in emerging-market stocks and bonds for BlackRock Inc. in New York, trades on economic and market fundamentals, not on speculation of what U.S. President Donald Trump will do next.
Emerging-market bonds and stocks are enjoying their best start to a year since 2011, buoyed by the idea that the initial selloff after Trump’s election was overdone, given that his threats of protectionism haven’t materialized.
“It’s been a bit confusing to understand what the true policy framework is,” Rodriguez, 44, said by phone. “We haven’t made significant decisions in the portfolio outside of trying to take advantage of some market dislocations that we’ve seen because of the violent price action.”
BlackRock’s Total Emerging Markets Fund has returned 29 percent over the past year, beating 73 percent of peers, by investing in Turkish and Indonesian stocks, Chilean and Polish dollar debt, among other developing-nation assets.
Here are Rodriguez’s investment picks and recommendations:
The drop in local bonds amid the peso’s slump has been “too extreme.” The fund has above-benchmark allocations of local Mexican debt and is underweight foreign bonds and equities. The short position in Mexican stocks has “nothing” to do with Trump, says Rodriguez, but more with “expensive” valuations and tighter Mexican monetary policy.
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“We need to get more clarity on what the true U.S. policy framework will be,” said Rodriguez, who spent 14 years in the Mexican finance ministry. “That’s why we’ve tried not to overreact to the recent threats against China and Mexico. We’ve been trying to be very careful because the underlying economic reflation story is very powerful.”
Russia’s economic recovery, expectations of monetary easing and low equity valuations have prompted BlackRock to be overweight the country’s stocks. Rodriguez favors the consumer-discretionary, telecoms and materials sectors and has below-benchmark holdings of energy shares, betting that the oil-price recovery has mostly run its course.
The fund is underweight Russian bonds as BlackRock prefers markets with more stable interest rates. He expects equities to be the main beneficiaries of the nation’s economic rebound.
“Possible sanctions relief is certainly a factor that makes us more comfortable with our long position in equities,” he said. “However, it’s not something we’d use as the main driver of our position in Russia, because there’s a lack of clarity of the policy framework in the U.S. Russia has been able to come back quite strongly after a difficult period.”
Rodriguez persevered through a selloff in bonds and the zloty after the Polish government started fulfilling campaign promises to expand social spending. Along with Chilean dollar debt, Rodriguez prefers Polish investment-grade sovereign debt to higher-yielding bonds from Brazil and Ukraine. BlackRock also has a limited overweight position in Polish equities in preparation for monetary easing in the east European country.
“We like Poland in the context of potential for the interest rates in the U.S. to go up,” Rodriguez said. “The risk in Poland has been going up with all these geopolitics and the increase in regional tensions. Still, when you look at Polish assets, they continue to be relatively well-behaved.”
Rodriguez started increasing BlackRock’s relatively large allocation of Turkish stocks in August and September of last year, as valuations hit a seven-year low following the failed coup. As the lira weakened to a record in January, the central bank took steps to bolster the currency.
“There’s still some big decisions to be made, the political environment is still tense, the referendum is coming up,” Rodriguez said, referring to the April vote to approve constitutional changes that would concentrate executive power in the presidency. “But that’s precisely the context in which a market becomes attractive. Our indicators still point in the right direction. The only thing that has turned a bit negative is the potential for interest rate increases.”