“Many investors think China equals emerging markets, but the global share of emerging markets' GDP ex-China is actually bigger than China,” Carter told FSA.
China accounts for 16% of the global GDP, while EM ex-China is 25%, he said.
In terms of the share of GDP growth, developed markets, China and EM ex-China are all equally contributing about one-third of global GDP growth.
“So if all you have in your [fixed income allocation] is developed markets and China, you’re missing a third of the piece. And this is what I find in Asia a lot – people like DM, people like China, but many investors dismiss the EM ex-China piece, which is at the moment the most interesting piece.”
The other EMs
One theme that Carter likes is long duration Latin America fixed income. LatAm generally had a sharp economic growth slowdown and political turmoil in the recent years, causing investors to take money out of the region and invest in Asia, where volatility is lower, he said.
In particular, Carter likes Brazil, which is finally showing economic improvement. He has overweighted Brazilian government bonds. “That was one of our biggest trades last year."
He has taken local currency bond risk because Brazil has double-digit interest rates and the central bank is expected to cut rates dramatically.
Eastern Europe, including Russia, is a “fundamental trade”, Carter said, adding that investors do not usually think about the region. “It’s sort of the forgotten region.”
However, the region is growing GDP at an average of 5%, which is much higher than the global average.
Although his entire portfolio is underweight corporate credit in general, he has invested in some Russian corporations.
“Russia is really an investment grade country that has been downgraded because of various sanctions. Corporates in Russia have been really hit because of the sanctions and people don’t want the risk of owning the corporate sector if there are further sanctions, which we do not expect,” he said.
In terms of valuation, Russia is one of the cheapest corporate markets in emerging markets. But his overweight in Russia is not as big as Brazil.
Elsewhere, he also likes Turkey. Like Brazil, he sees opportunity in taking local currency sovereign bond risk because of its double-digit interest rates and expectations of the central bank lowering rates.
Carter finds Asia the least interesting region.
“It never really sold off, it was the safe place to be, and now that everything else is coming back in a bull market, Asia is probably the area that is least interesting from a regional perspective,” he said.
Carter, who joined BNPP AM last year, manages three flagship emerging market fixed income strategies: hard currency, local currency and total return.
The total return strategy, the Parvest Bond Best Selection World Emerging Fund, is available for sale in Hong Kong, Korea, Macau, Singapore and China, according to FE data.
The three year-performance of the startegy versus its benchmark:
The fund NAV and benchmark index have been converted to US dollars for comparison purposes.