JUNE 2019
  2. Peru is no longer the unstable emerging market of the 1990s, but the bond market still views it as a risky place to lend to. Sally Greig explains why this misconception can be rewarding for clients.
  3. 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.

    Government bond investors often fall victim to that old adage: don’t let the facts get in the way of a good story. If a country has previously been synonymous with terrorism or corruption, few are prepared to go off the well-beaten path to establish the truth, so the ‘tale of the wicked witch’ endures long after life on the ground looks very different. 

    We found that with Peru. It’s a story that begins ‘Once Upon a Time’, when Cusco was the centre of the Inca empire and Lima was the city of kings. Fast forward 400 years to the 1990s, when the country was in the hands of a corrupt dictator and inflation was over 12,000 per cent. It’s the tale of a nation that fell from distant glory to become an unstable, risky place with an uncertain future – and the bond market reflects that.

    Lend to Peru for one year and you get around 2 per cent interest. Lend for twenty years, and the yield goes up to around 5 per cent. But Peru’s story did not end with the hyperinflation of the 90s, it’s still being written. That’s why we think it makes sense not to take the story that’s been handed down as fact, but to test it for ourselves.

    So while these rates of interest imply that it’s riskier to be in it for the long game, we believe this longer-term approach is more rewarding for our clients. Taking the long view is less about guess work and more about detective work – thoroughly getting to know a country’s past, so we can imagine its future. When you look at a country over the short-term, you don’t see the big changes that happen, and cannot build an understanding of its capacity for change.  

    That’s why, when we follow the story of Peru over the long term, we don’t just consider the latest copper export numbers, GDP or inflation print. Rather, our milestones are:

    • potential for growth (who does it sell to and what are its natural resources?),
    • sustainability (how much is it spending, borrowing and saving?)
    • and governance (who holds the purse strings and how are they responding to challenges the country might face?).

    On these milestones, Peru is in better shape than the bond market’s perceived wisdom suggests. This is a country which includes gold, copper and fishing among its major exports. Its biggest market is China, but in order to reduce its exposure to China’s changing fortunes, it has been building up its savings and reducing its debt levels, with its current debt just 25 per cent of GDP (compare that to the US where debt is 100 per cent of GDP).

    It has had the same Central Bank governor, Julio Velarde, for the past 13 years. Under his watch, the country has managed to sort out their financial house and has steadily reigned in inflation – to an average of 2.5 per cent over the last three years – and halved the dollarisation of the economy from 55 per cent to just 28 per cent. Velarde has continued to do the right thing over a long period and has slowly and consistently evolved Peru into a lower risk economy.       

    The question, going forward, is whether Peru will continue on this path? One of its challenges will be climate change. This is a country that is very vulnerable to El Niño, and it will become harder to recover and rebuild if this destructive weather pattern happens more frequently. We think, however, that its recent track record shows that it can adapt.

    This longer-context thinking allows us to peel back the layers and find Peru’s on-the-ground story, one that is very different to that of the risky emerging market of the 90s still proffered by the bond market. And for the past two years, in trekking the Inca trail, this discrepancy between fact and fiction is something our clients have been able to reap the benefits of. Now that’s a story with a happy ending.

    Annual Past Performance to 30 June Each Year (%)

       30/06/2015 30/06/2016 30/06/2017 29/06/2018 28/06/2019

    Bailie Gifford Emerging Market Bond B Inc

    -11.6 17.3 11.0 -8.2 10.9
    The J.P. Morgan GBI-EM Global Diversified Index + 0.6% -7.4 20.6 10.1 -3.3 13.7

    Source: FE, single pricing basis, total return. Sterling GBP.

    Past performance is not a guide to future results.
    The manager believes this is an appropriate benchmark given the investment policy of the Fund and the approach taken by the manager when investing




    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).

    Ref: 41792 IND WE 1418