By Marc Jones
LONDON (Reuters) - Labelled the emerging market "toxic trio" until not so long ago, the high-yielding bonds of Ukraine, Argentina and Venezuela have come up smelling of roses for those who were brave enough to buy into them at the start of the year.
Ukraine's debt restructuring, pro-business Maurico Macri's election win in Argentina and hopes Venezuela will see something similar on Sunday, have seen a dramatic turnaround in investors' attitude towards all three countries.
Ukrainian bonds have returned almost 50 percent this year, making them the world's best performers, and Venezuela and Argentina are number two and three having chalked up gains of 28 and 24 percent respectively.
Combined they have also contributed more than 65 percent of gains of the biggest emerging market bond index, the JP Morgan EMBI Global, despite only accounting for just over 7 percent of it. The question is, where do they go from here?
"This year it has been the trio of what most people would know as some of the most risky bonds that has done the best," said Guido Chamorro, an emerging market portfolio manager at Pictet Asset Management.
"For a lot of investors it has probably been quite frustrating because not many would have had overweights on those bonds because of the risks."
Such stellar returns are rare and certainly don't get repeated too often in countries with such shaky records.
Ukraine's investor-friendly restructuring deal in August took many people by surprise but there is still an unresolved issue of $3 billion it owes Russia, the ongoing fighting in its eastern regions and an economy locked in a brutal recession.
Kevin Daly at Aberdeen Asset Management thinks the country's bonds could continue to gain for a while longer, if only because their improvements in the EMBI Global will effectively force fund managers who follow the index to buy them.
Others are more sceptical, however. Ukraine has a habit of not sticking to IMF programmes and its currency remains a risk.
The bonds
"Ukraine is supported by the IMF so they are not going to default now, but at the same time the fundamentals are still terrible," said Societe Generale's director of EM sovereign Credit Strategy, Regis Chatellier.
CARACAS?
It is not only Ukraine, Argentina and Venezuela that have meant 2015 has been a topsy turvy year for EM veterans.
Chinese assets were top tips and flying until they tanked in spectacular fashion around June, while another analyst favourite, Indonesia, bombed too as its trade links to China compounded disappointment over the government's reform efforts.
Of the other "toxic trio" members, Argentina's rally has come on the back of the surprise election victory for Maurico Macri, who has vowed to return the country to global markets.
His hard work starts now though. One of the key issues is whether he can end a long running dispute with a group of holdout bond holders that has blocked Buenos Aires from issuing dollar debt for roughly a decade.
Shahzad Hasan, a portfolio manager at Allianz (DE:ALVG) Global Investors, said it would be a positive signal if Macri made an early effort to convince U.S. District Judge Thomas Griesa, who is enforcing the debt ban, to loosen the restrictions.
"We still have a small overweight in Argentina but we have trimmed it a bit," said Hasan. "Macri has to negotiate with the holdouts... but he a lot of tailwinds behind him."
Hasan also has a small overweight on Venezuela, the final country on the axis of uncertainty.
Caracas has confounded expectations by avoiding a default with a number of unconventional financing deals including a loans-for-oil arrangement with China.
But as the world's 11th biggest oil producer, its finances are being battered by low crude prices. Elections on Sunday compound the uncertainty.
The government and state oil firm PDVSA is estimated to have roughly $2-2.5 billion of debt to pay in the first half of the year and around $4.5 billion in the second half.
Polls predict voters will punish the ruling socialists, possibly taking away their majority in the National Assembly for the first time since Hugo Chavez took power in early 1999.
"It's not a question of if Venezuela will default, it's when and how badly," Mauro Leos, Moody's top sovereign analyst said at a conference in London earlier this month.
Analysts at Barclays (L:BARC) though sense a Ukraine-style opportunity though with a pinch of Argentina also thrown in if the opposition 'Democratic Unity' coalition wins on Sunday.
"We recommend exposure in the back end of PDVSA, as we believe that market prices underestimate recovery values and low cash prices provide the potential for significant returns should positive drivers materialise," they said.
Graphic: http://link.reuters.com/fac26w