LatAm allocation a 'must' for portfolios, UBS EM Americas CIO says

BY Reuters | CORPORATE | 06/18/24 01:40 PM EDT

By Mehnaz Yasmin

June 18 (Reuters) - A spate of political reforms and economic cycles has elevated Argentinian dollar-denominated sovereign bonds and Latin American corporate bonds to rank among key "areas of interest," the chief investment officer of emerging markets Americas at UBS Global Wealth Management said.

"It is a mistake to overlook LatAm," Alejo Czerwonko told the Reuters Global Markets Forum on Monday.

"Strategically, an allocation to LatAm assets in portfolios is a must, not least as valuation across equities, some fixed-income segments, and a number of currencies, are quite depressed at the moment," Czerwonko said.

Emerging markets in Latin America have been rocked by major policy shifts this year, leading to spikes in volatility and sell-offs across various asset classes, which in turn have created attractive entry points.

Argentinian sovereign bonds have rallied this year on hopes of reforms by libertarian President Javier Milei and fiscal tightening, as the country's Senate passed a bill key to his plans, even renewing a currency swap loan agreement with China.

Czerwonko said he still sees "opportunity" in Argentinian dollar-denominated sovereign bonds as he believes Argentina will avoid a debt restructuring due to progress on fiscal consolidation and reforms, along with rebuilding of foreign exchange reserves by Milei's government.

"There is widespread recognition that addressing Argentina's structural economic imbalances necessitates of short-term pain for long-term gain," he said.

Additionally, Czerwonko sees a wide range of opportunities in the Latin American corporate bond market as large corporations navigate different phases of the economic cycle with liquid balance sheets, comfortable debt maturity profiles, low leverage and financing risks.

Mexico, in particular, "enjoys a number of secular tail winds, so we are tracking (the) peso and Mexico rates very closely," Czerwonko said, citing its proximity to the U.S., ample networks of free trade agreements and a young workforce.

"U.S. remittances are flowing in to Mexico at a record $60 billion annually, and this process of economic integration has more room to run, in my view," he said. (Join GMF, a chat room hosted on LSEG Messenger, for live interviews: (Reporting by Mehnaz Yasmin in Bengaluru; Editing by Divya Chowdhury and Matthew Lewis)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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