Page 9 - ISQ - April 2022

INVESTMENT STRATEGY QUARTERLY

market prices generally moved higher. It also helped managed
We are also starting to warm up to local currency emerging mar-
kets debt. While developed market central banks are just starting money by diminishing timing effects on liquidations. Most bonds
to normalise monetary policy, the tightening cycles in emerging exhibited profits throughout their holding periods. Tightening
markets are well underway. Central bankers in Latin America and spreads created pricing tailwinds. These tailwinds vanish when
Emerging Europe were among the first to respond to the esca- interest rates rise, and spreads widen. Total return bond strate-
lating inflationary pressures that emerged late last year. gies may be strapped with added challenges in a generally rising
Significantly higher interest rates across Latin America are interest rate environment. Higher yields and spread widening
taking a toll on growth now that rates are well above their can create an opportune time to increase fixed income holdings
pre-pandemic levels in most countries across the region. In fact, which provide principal protection and steady cash flow –
two of the largest economies in Latin America, Brazil and Mexico, regardless of market volatility or geopolitical events.
slipped into a technical recession, which is defined by two con- Q: Should I be concerned about falling bond prices?
secutive quarters of declining economic growth, last year. While
the growth slowdown suggests we may be nearing the end of the A: Investors have a natural predisposition and sensitivity to their
tightening cycles in some emerging markets, we think central investment portfolio holdings’ price performance. Observing a
bankers will be reluctant to respond to growth concerns as security’s negative price change can be emotional and maybe
long as inflation remains elevated. We are carefully watching even traumatic. After all, poor price performance can be dam-
how this dynamic plays out as we believe there may be aging to one’s financial health and place an investor in the
attractive opportunities in select local currency markets in undesirable circumstance of having to ‘make up’ a loss of prin-
the months ahead. cipal or hard-earned income. Price declines’ unwelcome effects
apply to many growth and total return strategies; however,
with individual bonds, there are key differences. As interest
Doug Drabik rates rise and individual bond prices fall, there is no interrup-

Q: Why bonds in this market? tion or reduction to the bond’s cash flow and income stream.
Interest rates have risen with intermittent swiftness since the
A: There is typically a trade-off observed between investment start of 2022. When a portfolio displays ‘red’ figures on indi-
types. Striving for strong alpha (beating the market averages) vidual bonds, remember the primary purpose of these holdings
will likely come with additional risks of some sort. For decades is often principal protection and balancing a portfolio strategy.
now, added market volatility risk has been offset by the positive Despite the negative market price movement, this portion of
total return effects of falling interest rates and tightening credit the portfolio maintains cash flow, yield and principal when
spreads. Money managers and individuals alike benefited when held to maturity, barring an unlikely default.

Emerging Markets
Asia Poised for a Pro-Growth
Policy
Rebound?

In addition to its already cheaper Cheaper
valuation, with China instituting Valuations
pro-growth policies and relaxing Emerging Markets
its regulations, we are optimistic
on the region for 2022. As China China
makes up ~40% of the MSCI
Emerging Markets Index, we expect Relaxed
a positive performance to have a Regulations
huge impact on the broader index.

9