1. Economic Losers Can Be Bond Winners

  2. The value of an investment in the fund, and any income from it, can fall as well as rise and investors may not get back the amount invested.
  3. December 2019

    Weakening economic conditions are prompting governments in emerging markets to tighten up their policy framework. And we believe that additional rigour is, in turn, creating attractive investment opportunities in some bonds.

    The pace of globalisation is continuing to slow. But although that’s generally seen as bad news for markets, we believe it’s actually creating great opportunities for us as emerging market bond investors.

    There are various reasons for the current slowdown, including trade barriers and an increasingly inward-looking political environment in major economies. The deceleration in growth has been evident over the past five or six years, as trade wars have intensified, with the bitter conflict between the Trump administration in the United States and the Chinese regime the most obvious case in point.



    It hasn’t helped that the Sino-American tussle has coincided with China’s pace of economic growth slowing - from the exceptional rates achieved in recent decades to what might be considered normal levels.

    At the same time, a switch in some parts of the world away from traditional energy sources to more environmentally friendly alternatives has also hit commodity prices and damaged exports from many developing economies.

    I think, when you combine these factors, it’s clear why we’re seeing a slowdown, especially among emerging market economies that have built their expansion on exports to more powerful nations. Adding to the uncertainty is the possibility of further economic weakening over the next few years as the current slowing trend gathers momentum.

    And yet, although it might seem counterintuitive, we see this as a great time to be investing in bonds issued by some emerging market governments. That’s because a more challenging environment is forcing many of the countries that rely on exports to strengthen their policy framework. And that, in turn, is making them more attractive to investors.

    Naturally, some countries are more likely than others to be successful in tightening up processes and bolstering their economies. We believe those that do it well, and manage to improve their growth and governance potential, will benefit from a positive impact on the long-term living standards of their population. And that, of course, means they are more likely to see better economic growth than the ones who fail.

    At Baillie Gifford, we’re active global investors. We focus our efforts on economies with resilient growth, and those with a solid sustainability and governance framework. Once we have identified the most appropriate places to invest, we spend a lot of time analysing the current position and the longer-term outlook. Only then do we commit our clients’ money.

    In looking at emerging market bonds, we’ve found some interesting investments that we believe will give us attractive income and capital appreciation opportunities over the current economic cycle.

  4. We focus our efforts on economies with resilient growth, and those with a solid sustainability and governance framework.
  5. So what have we found so far?


    While we may still have reservations about some of the things taking place in Russia, we like what is happening in the economy. The country has massively reduced its debt measured in US dollars and has increased its US dollar reserves. When we combine these two factors, it means that the probability of financial crisis or a default event meaning Russia is unable to settle its debts is now extremely low.

    We’re also keen on the outlook for Indonesia. After what seems like many decades of procrastination, the country is increasing its infrastructure network, while focusing on simplifying its complicated business environment. We believe that should have a positive impact on prospects for economic growth there.



    Brazil is another country where we see positive developments. It appears to have failed to follow through on many previous opportunities, but there are now signs of improvement, such as pension reform, which should go a long way towards strengthening what has been a tricky fiscal position.

    What makes our analysis interesting is that each of these countries is widely regarded as being among the likely losers in the current global trade environment. The way we see it, the key is not the problems themselves but the way these countries have reacted to the challenges.

    In fact, we’ve watched their response to the difficulties they have faced in the past five years or so. And, we’re impressed by the actions they’ve taken.  

    It’s never easy for a government to pursue a route that leads to painful reform. Nor has it been easy in the case of this trio. However, Russia, Indonesia and Brazil have all tackled the hurdles that litter the road to reform.

    And, for us, that willingness to face the challenge head on is the crucial first step towards becoming an attractive emerging market bond investment.


    The views expressed in this blog should not be considered as advice or a recommendation to buy, sell or hold a particular investment and it does not in any way constitute investment advice.

    This communication was produced and approved on the stated date and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

    This blog contains information on investments which does not constitute independent investment research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned.

    Bonds issued by companies and governments may be adversely affected by changes in interest rates, expectations of inflation and a decline in the creditworthiness of the bond issuer. The issuers of bonds in which the fund invests may not be able to pay the bond income as promised or could fail to repay the capital amount.

    The fund invests in emerging markets where difficulties in trading could arise, resulting in a negative impact on the value of your investment. The fund’s investment in frontier markets may increase the risk.

    The fund has exposure to foreign currencies and changes in the rates of exchange will cause the value of any investment, and income from it, to fall as well as rise.

    Issued by Baillie Gifford & Co Limited which is authorised and regulated by the Financial Conduct Authority (FCA).


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