Global High Income Dollar Fund Inc. – Fourth Quarter 2004 Commentary
NEW YORK — Global High Income Dollar Fund Inc. (NYSE: GHI) is a non-diversified, closed-end management investment company seeking high current income and secondarily, capital appreciation through investments primarily in securities of emerging market debt issuers.
At the end of December, Emerging Markets Debt (EMD) spreads (excluding defaulted countries) were 290 basis points (a basis point is 1/100 of a percent) over equivalent US Treasury yields, a narrowing of 43 basis points during the fourth quarter. For many countries within the asset class, this placed spreads below their levels of January 2004, and, more importantly, near the record-lows of 1997.
The ongoing decline of EMD spreads was driven by low US Treasury yields and the resulting availability of attractive carry in EMD investments. Given this, investors seemed less concerned with the possibility that interest rate hikes in the US could lead to a reversal of recent capital inflows into emerging markets. Moreover, economic growth in emerging markets continues to be generally strong, providing fundamental support for the asset class.
Despite tighter monetary policy, Brazil continued to experience strong economic growth, helped by lower interest rates along the curve. Since the beginning of the quarter, spreads in Brazil narrowed by roughly 100 basis points versus US Treasuries. In Argentina, the combination of an ongoing economic recovery, good fiscal performance and expectations that debt restructuring would soon be completed created a favorable backdrop. All told, during the fourth quarter, Argentina spreads declined by 360 basis points. In Russia, spreads declined roughly 90 basis points as macroeconomic fundamentals continued to improve and international reserves accumulated due to high crude prices. So far, the bond market generally has shrugged off the government’s harsh treatment of Yukos.
While strong fundamentals and capital flows have compressed spreads close to record-lows, we believe value may still exist within the asset class. The major economies of Latin America are growing in concert, something that has not taken place in decades. European Union accession for the economies of Eastern Europe, an increasingly important region for EMD, is also supporting economic performance for the asset class as a whole. Moreover, we think that value may still be found within sub-classes. For example, BB-rated countries continue to trade at wider spreads than BB-rated US corporates.
Due to these improved economic fundamentals and strong asset flows into emerging markets fixed income securities, our market exposure is still slightly higher than that of the JP Morgan Emerging Markets Bond Index-Global (EMBI-G). In fact, market exposure–primarily investments in local markets–was increased somewhat in November 2004. Going forward, however, we currently intend to look to reduce overall market exposure. As for specific country positions, we had a 2.5% underweight in Turkey versus the Index at quarter end. Our Turkey position includes a 2.4% position in domestic T-bills. Conversely, at 6.5% our largest overweight is in Argentina, and we are 3% overweight in Brazil. It is also worth noting that, given the tight spread environment, we have sought investment opportunities in local markets. At the end of the quarter, the portfolio held a position of approximately 13% in local market securities-that is, securities that are denominated in local currencies (as opposed to the USD), and which typically have higher yields.
The Portfolio is actively managed and its composition will differ over time. The views expressed are those of UBS Global Asset Management and its member firms (and individual portfolio managers) as of December 31, 2004. The views are subject to change based on market conditions; they are not intended to predict or guarantee the future performance of the markets, any market segment or any fund. It should not be assumed that investments in these securities were or will be profitable.
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