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Fuel for the fire: why Venezuela could still surprise EMD investors

Fuel for the fire: why Venezuela could still surprise EMD investors

Vontobel’s head of emerging market has retained his 4% exposure to Venezuela in his flagship $530 million fund despite increased political and economic turmoil in the country.

Luc D’Hooge, who visited the country earlier this year, said President Nicolás Maduro’s latest measures are drastic but do not signal a country in a pronounced crisis.

On 18 February, Maduro raised the price of gasoline for the first time in 20 years and also devalued the country’s currency from 6.3 bolívares per US dollar to 10.

Speaking to Citywire Selector, D’Hooge said there has been a feeling in the market that Maduro would need to address the exchange rate to stimulate markets but suggested the country would still need external help.

‘We think they will still need to go to the IMF because they are coming to a point where financing will be extremely difficult towards the end of October,’ he said.

'They have been hurt by the drop in oil and the government now knows that they have to take measures, which they have finally started doing, but they need to continue on this path.’

D’Hooge, who runs two emerging market funds at the Swiss group, said the reign of President Maduro is increasingly tenuous, having being under fire since succeeding long-serving President Hugo Chavez when he passed away in 2013.

With increased pressure to redress the financing gap, D’Hooge said the government is now waking up to the economic challenges it faces and even making efforts to work closely with its political rivals.

‘There are clear geopolitical concerns and the country has an extreme liquidity problem, as well extremely poor leadership. However, we think, with increased collaboration with the opposition, there some hope of overcoming these difficulties,’ he said.

With that in mind, D’Hooge has retained exposure to the market, having held it steady between November and December 2015 at 4.7%. Despite the turbulence and concerns over future payment, D’Hooge said the sovereign story remains attractive.

We have a clear indication that all sides know that a default would be extremely painful as it would hurt the dollar flows coming from the oil industry. In this scenario, with bonds priced where they are, I think they are not that bad and could be quite interesting as the story develops. I do however think they will need bridge loans and bond restructuring.

‘With the world’s biggest oil reserves we see this as a liquidity problem, not a solvency problem. Therefore, at the moment, recovery rates appear higher than bond prices,’ he added.

The Vontobel Fund Emerging Markets Debt fund returned 0.2% in the 33 months since launch, which compares to a 5.98% rise by its Citywire-assigned benchmark, the JP Morgan EMBI Global Diversified TR, over the same timeframe. Both measures are in US dollar terms.

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