AXA IM: Smart Management Key to Unlocking Potential of EM Short Duration Bonds

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This is a sponsored article from AXA Investment Managers.

Traditional safe havens in the bond market have been battered by the winds of economic change. Investors need to diversify and look further afield at a time when interest rate rises are looming and yields on corporate and government bonds in developed markets are at historic lows.

As a result of this paradigm shift, attention has turned to emerging market (EM) short duration bonds, which combine flexibility and liquidity with the prospect of better yields than those found in developed markets, according to market specialist AXA Investment Managers (AXA IM).

“EM short duration bonds may offer an attractive risk return profile, benefiting from comparatively low volatility by their short duration nature,” says Sailesh Lad, Manager of the AXA IM Emerging Markets Short Duration Bonds strategy.

“They are less sensitive to interest rate movements and may have the added advantage of a clearer visibility of cash flows. The opportunity set is large and plentiful across the credit spectrum in both sovereign and corporate debt despite the maturity restriction.”

The EM bond market boasts four potential compelling advantages for investors, according to AXA IM:

  • SIZE: It is large and liquid, covering over US$1.7 trillion of debt.
  • DIVERSITY: It has many different countries within the asset classes to choose from, including hard and local currency government bonds, corporate bonds and FX, ranging from quality investment grade to high yield.
  • OPPORTUNITY: It provides opportunities no matter where the economic cycle is, as some EM countries benefit from strong commodity prices while others take advantage of comparatively low commodity prices.
  • PERFORMANCE: Some Brazilian corporate issues have yielded as much as 9% while some bonds issued by the Indonesian government in their local currency yield around 7%.

They carry risk too, however. EM countries are sometimes subject to political instability, commodity price volatility and changes in developed central bank monetary policy that can trigger capital flight and currency depreciation.

But default rates in EM markets are generally low and risks can best be managed by broad diversification and, in particular, strong active management, AXA IM says. Thus, the critical difference lies in differentiation and the execution of the strategy.

“We have an extensive research department which we leverage off for fundamental analysis of individual corporate and sovereign credits,” points out Lad.

“We are very conscious of sentiment and technicals driving both the market and individual credits. Having this awareness means one should be able to react to fundamental shifts, especially when you marry it with a good understanding of market liquidity.”

AXA IM, one of the market leaders in short duration fixed income strategies, has a 15-year history in this space and manages more than EUR 26 billion (as of 31 October 2017).

Sources: AXA IM as at November 2017

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This is for information purposes only and does not constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services and should not be considered as a solicitation or as investment advice.

The content herein may not be suitable for retail clients. No financial decisions should be made on the basis of the information provided.

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Such information may be subject to change without notice. The data contained herein, including but not limited to any backtesting, simulated performance history, scenario analysis and investment guidelines, are based on a number of key assumptions and inputs, and are presented for indicative and/or illustrative purposes only.

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This is a sponsored article from AXA Investment Managers.

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