Against the backdrop of recent huge inflows into the emerging markets fixed income, Indonesia is becoming an attractive investment destination.
In his latest investment commentary, Van Overfelt said Indonesia is attractive due to its relatively low debt-to-GDP ratio and the current government, which remains supportive of growth through infrastructure spending.
‘If reform momentum is sustained, rating upgrades are possible. In addition, there are relative-value opportunities if we compare euro-denominated securities to the US dollar counterparts of the sovereign,' he said.
Van Overfelt added that Indonesia issued bonds both in US dollars and in euros, with euro-denominated securities demonstrating higher spread and a steeper curve. He compared a euro-denominated bond maturing in 2025 versus US dollar bond maturing in 2026 as an example.
‘The euro-denominated bond offers a spread in excess of 80 bps compared to the US dollar bond. These bonds have the same issuer risk, yet the euro-denominated bond offers a better return even after costs of hedging a currency, with a lower maturity.’
Van Overfelt highlighted how emerging market fixed income had experienced over $5 billion inflows since the start of the year, as interest rates remained low and US dollar has not gone through the roof.
‘With emerging market hard currency debt spreads above 350 basis points over US treasuries, it’s understandable that this asset class is in demand,’ said Van Overfelt.
He added flows went both into hard currency and local currency bonds. However, he said, in the case of bonds denominated in the issuer country’s own currency investors should take into account volatility linked to currency risk.
The fund manager also believes recent flows into emerging markets debt supports his team's long-held view that the spread carry run continues and investors should look into spread products more.
This was first mentioned by the firm's head of corporate bonds, Mondher Bettaieb, who said government yields are likely to stay low for quite a long time because inflation is unlikely to come back. As a result, he said it is worthwhile investing in spread products, where spread represents a credit risk of the company, which investor is willing to take.
‘While government bonds yield almost nothing, spread products might provide you with 1.5% because your spread is 120-130 basis points or even a little bit more if it is in the high yield space,' Bettaieb said.