Ukraine and Argentina Top Amundi Emerging-Market Favorites List

Nariman Gizitdinov
·6 min read
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(Bloomberg) -- Europe’s biggest money manager is counting on Donald Trump’s return and Javier Milei’s “shock therapy” to pay off big for bond investors in Ukraine and Argentina, in a bet that right-wing populism will determine the most compelling stories in emerging markets next year.

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After elections in countries from Turkey to Argentina marked turning points for traders in 2023, Paris-based Amundi SA is parsing the implications of political watersheds for the year to come. Argentinian and Ukrainian dollar securities are already among top performers in the emerging world this year, against the backdrop of a dovish shift by major central banks that’s propelled a rally in the world’s riskiest bonds.

“We are very positive on Argentina and Ukraine,” said Yerlan Syzdykov, Aumndi’s global head of emerging markets. “These are our top picks where we believe that there’s still significant value despite the setbacks on the battlefield for Ukraine.”

Amundi is already putting some of its $2 trillion under management into Ukraine’s international bonds, betting that pressure from the US will push the government in Kyiv into talks with its invader Russia, Syzdykov said. The prospect of Trump winning next year’s US election could make a deal unavoidable, he said.

“We believe that next year is going to be the year where finally we’ll be able to stop this war,” he said, adding that a post-conflict focus on reconstruction and European Union membership would be “unequivocally very positive” for Ukraine’s assets.

It’s a risky call, not least because neither Ukraine nor Russia have showed interest in peace talks, and Ukraine’s path to EU membership is littered with obstacles. And there are concerns that if Ukraine makes concessions, Russia may not stop there.

Ukrainian President Volodymyr Zelenskiy has refused to negotiate until Russia withdraws from occupied territories. In August 2022, the government froze payments on its $20 billion of foreign debt for 24 months, and it’s an open question as to how it will be restructured when the pause ends.

The Kremlin, for its part, has cited Ukraine’s deepening integration with the West as a justification for its 2022 invasion. There are also disputes within the EU over backing Ukraine, with Hungary opposing funding and warning the bloc to drop membership talks from its agenda or face “devastating consequences.”

Nor, for that matter, is Trump’s return at the end of 2024 a sure thing.

“Although the US elections are indeed in November, the markets (and politicians) will start pricing the results much sooner, putting pressure to find a negotiated solution,” Syzdykov said. “There is also an internal demand for peace talks that will only grow and the political class will have to adjust.”

Amundi’s other big hard-currency bet is equally risky: Argentina, where it’s adding to bullish positions it has in sovereign and provincial debt and some corporate bonds. That’s based on a bet that Milei, the self-described “anarcho-capitalist” who swept to the presidency last month, will deliver radical fiscal adjustments.

“We’re already long,” Syzdykov said of Argentina, a serial defaulter, in an interview before the government announced the start of its “shock therapy” on Tuesday, including a 54% devaluation of the peso. “Of course there will be moments when there will be frustration with the pace of reforms potentially. So we will use that as an opportunity to add.”

Read More: Milei’s Shock Therapy Already Leaves Investors Craving More

Amundi Asset Management, which has about €28 billion ($30 billion) of its €40 billion allocation to emerging markets in fixed-income securities, is picking through other global markets as central banks including the Federal Reserve look set to end their most aggressive monetary tightening campaign in a generation. Emerging assets have swung dramatically in 2023, blindsiding traders as 10-year US yields briefly topped 5% and China struggled to rev up growth.

The fund has outperformed 75% of peers in emerging-market bonds this year, returning 7.7% in dollar terms, according to data compiled by Bloomberg. Syzdykov said most of that performance has come in the last quarter and it expects high single-digit returns again for the asset class in 2024.

In local-currency debt, Amundi says Brazil and Mexico are its “main overweights” as it shorts Asia versus Latin America on interest-rate and inflation divergences. “More of the returns that we’re predicting for local currencies will come from some of the idiosyncratic stories,” Syzdykov said.

Amundi isn’t yet sold on the prospects of a turnaround for local debt in Turkey, saying approaching municipal elections in March make for “risky timing” should President Recep Tayyip Erdogan put politics ahead of economics.

“We’re not yet there for us to have full confidence of being long Turkish assets,” Syzdykov said. “Around the time of the elections, I think investors will start looking at Turkey more seriously with a view to returning.”

Amundi also has a long bet on Indian assets but isn’t yet buying more in the short term, Syzdykov said. “Over the next decade, this is probably our top pick from the country perspective, both equity and fixed income,” he said.

Syzdykov is also cautiously bullish on Kazakhstan, in part as a commodity-heavy proxy for Russia since the latter was kicked out of most emerging-market indexes. “We’re going to see how the situation develops on the oil side given that Kazakhstan is quite dependent on oil and gas,” he said, noting opportunities also in uranium, as well as green and nuclear investments and trade with China.

Across emerging markets globally, it’s risks in the “geopolitical area” that remain hard to price, Syzdykov said, singling out a possible escalation between China and Taiwan. Elections in Taiwan next month could play out in ways that may prompt China to impose an economic blockade of the self-governed island, he said, calling such a scenario “absolutely plausible.”

Another risk that markets might be overlooking is the possibility of looser fiscal policies in the US amounting to a “big fiscal stimulus,” which is also dependent on whether or not US voters elect Trump again.

“The risk on the fiscal side coming from Trump — that’s something that probably we’re not really pricing in,” he said. “This could be something that the market will start pricing in next year and that will really change the scenario for both inflation and interest rates.”

--With assistance from Netty Ismail and Selcuk Gokoluk.

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