Follow growth beyond borders

Dwindling returns are driving investors out of Europe and Asia, but many say it’s time to look beyond North American borders.

Recent measures taken by the European Central Bank (ECB) to backstop the euro, along with the ongoing economic reforms in India, are examples of the signs encouraging foreign investors, says Patrick Bradley, product specialist with the global fixed-income team at Brandywine Global Investment Management in Philadelphia.

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His firm manages the Renaissance Global Bond Fund and he co-manages the Renaissance Optimal Income Portfolio.

“Our view with regard to the euro and Euro countries has changed a little,” he says. “Our direction has been less negative with regard to the region.”

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One of the factors that’s changed Bradley’s outlook is the recent move by the ECB to buy Spanish and Italian government bonds.

“For the longest time the ECB [avoided this] but [it’s now] going to utilize its balance sheet, just like the U.S. Federal Reserve had done,” he says. “That’s positive [and] has been reflected in what we’ve seen as rallies in Italian, Portuguese and even Spanish bonds.”

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Bradley considers Italy as the strongest of the three troubled economies in Europe. He’s confident enough to have initiated a small position in Italian bonds.

“A lot of people don’t realize Italy is running a budget surplus after you take out the interest expenses,” he adds. Though it’s lost on lot of people, “its instituted policies will reduce its deficit over time and the economy is going to pursue policies that are going to make that economy more efficient.”

There are also some opportunities in countries in Australia and the Far East. As such, Bradley’s portfolio has some currency-hedged exposure to Australia and New Zealand, but he’s “sold out of our Indonesian position [while retaining] investments in Singapore and Korea.”

On the currency front, he favours the Indian rupee over the Chinese renminbi.

“We closed out an exposure to the Chinese currency with a view that heir economy is going to slow down,” says Bradley. “We initiated [a position] in the India rupee [with an] exposure of roughly 4% via a currency forward, due to a big pick up in yield compared to U.S. short-term yields of 520 basis points.”

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The Indian rupee recently sold off significantly and is expected to rally. As well, the Indian government recently enacted some measures to help attract foreign investments into the country.

“This could create a demand for the [Indian] rupee,” says Bradley. “Foreign companies are now going to be able to purchase equity in state-owned enterprises.”

A rise in foreign direct investment in India would stimulate infrastructure investment and foster economic growth over the long term, he adds.

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