OTTAWA (MNI) - The world after Brexit is one of heightened uncertainty with a higher risk of a global recession, which is "bad news" for most commodity-led countries and their currencies, T. Rowe Price Global Unconstrained Bond Fund Portfolio Manager Arif Husain told MNI.
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As a result, notwithstanding the recovery of commodity prices since the beginning of the year, including oil, he continues "to position the portfolio for a correction in commodity currencies by expressing short positions in currencies like the Australian dollar and the Canadian dollar."
On the debt side, however, Canada and Australia are among the portfolio managers' favorite bets in the global sovereign debt space when looking for markets where interest rates have the potential to fall further and which could still be a safe haven in time of market stress.
"High quality countries like Australia, Canada, South Korea, and Sweden continue to offer value in that sense, and so does the long end of the U.S. Treasury curve," he said.
Also reflecting an overall defensive approach, the allocation to EMU peripheral debt has been reduced as Husain expects political uncertainty to increase.
"While domestic political risks have subsided in Spain after the general elections last Sunday, political implications for Italy could be more serious and the upcoming referendum on a constitutional reform in October 2016 will be a key factor to watch," he said.
However, he expects the European Central Bank to step in if necessary. "So any meaningful correction in periphery spread countries in Europe is likely to represent a buying opportunity for the portfolio."
At the end of May, Australia's 4.50% April 2020 bond was the fund's largest holding, followed by Canada's 1.50% June 2026 issue. Australia was also the largest country exposure, followed by the U.S.
"Australia is a typical safe haven country offering decent yield, low risk and a AAA anchor, with potentially more rate cuts to come," Husain said. With the shrinking universe of such opportunities, he continues to overweight Australia, "where fundamentals, valuation and technical factors justify an allocation and where the risk of being wrong is relatively low."
In the U.S., the second largest country exposure, the impact of the Brexit remains unclear, but Treasuries have been a good safe haven bet. However, the curve flattening had led long-term yields to new lows. That being said, the portfolio manager maintains his allocation for the time being as "we feel that the U.S. curve has potential to flatten further," he said.
Longer term, he sees opportunities in high yield and some emerging markets with sound fundamentals where price dislocation could offer attractive entry points.
This is the case in U.S. high yield, where defaults could rise in months ahead, potentially triggering outflows and in turn "large price disclocations."
But overall, he has maintained the defensive position he had going into the Brexit vote: long safe haven assets such as the Japanese yen and German bunds, short some emerging market currencies and credits.
The long yen position is consistent with the portfolio manager's long position in G3 currencies - yen, U.S. dollar, euro - against Asian currencies and against specific emerging market currencies.
Given his concerns over market liquidity, the currency positioning is more the reflection of a defensive approach than fundamental bets, as China, in his view, will be the next region where global uncertainty could come from.
"Being underweight Asian currencies like the Malaysian ringgit and the South Korean won is a good way to balance the risk of the portfolio," Husain said.
On the fixed income front, he believes it is too early to add exposure to emerging markets, although, when scanning opportunities among the riskier fixed income asset classes, "emerging market local sovereign bonds seem to offer some of the most interesting opportunities if we can move to a more stable global environment."
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