(Bloomberg) -- Shamaila Khan at UBS Asset Management has deployed a somewhat counterintuitive strategy for bond investments.  

The head of fixed income for emerging markets is breaking with the likes of Goldman Sachs Group Inc. and is steering clear of investor favorite Indian government debt, while embracing volatile Chinese high-yield bonds, which have suffered from a prolonged property crisis. 

The gist of her strategy — which has allowed the UBS Emerging Economies Global Bond Fund to beat 89% of peers over the past year — is to seek out areas where she thinks market risk is mispriced. For India, she says the market is too sanguine about Prime Minister Narendra Modi’s electoral setback and the complexities of a coalition government. 

“In India, the market underestimates the risk, while in China high yield, Sri Lanka and certain other corners of EM, the market overestimates the risk,” Khan, who manages combined assets of roughly $1 billion, said in an interview this week. “We are trying to look for countries where the market has overestimated the risk.”  

Pakistan has been a top pick, Khan said. Its US-currency debt has rebounded over the past year.

Chinese high-yield dollar bonds have also climbed, with Bloomberg’s index returning nearly 10% this year. Fueling the recovery has been Beijing’s attempt to put a floor under the property crisis with a broad rescue package in May. 

“A lot of risk premium” on Chinese junk bonds has already been priced in, according to Khan. “That is a view we have had for several months,” she added. 

But some developer bonds are trading at distressed levels and have lost money over the past year. One such instance is Country Garden Holdings Co. Data compiled by Bloomberg based on the UBS fund’s February filing shows it holds the Guangdong-based builder’s April 2026 dollar bond. 

That security is now trading at less than 10 cents on the dollar, down from 43 cents a year ago. Country Garden has been trying to fend off a liquidation petition filed by a creditor in a Hong Kong court. Fellow developer China Evergrande Group has already been ordered to liquidate.

UBS spokesman Huw Williams declined to comment on when the Country Garden bond was acquired and whether the fund still holds it, citing a policy of not discussing individual positions. 

In India, government bonds rallied in May ahead of their inclusion into JPMorgan Chase & Co.’s key index. The momentum gathered pace as S&P Global Ratings said India could see a credit rating upgrade in the coming years if it commits to reducing fiscal deficit. 

That optimism briefly wavered as election showed a narrow win for Modi, forcing him to rely on a coalition government and raising the risk of more populist spending. But the decision to reappoint several cabinet officials, including Nirmala Sitharaman as finance minister, was welcomed by analysts as a sign of policy continuity. Asset prices have climbed 

For Indian government debt, “The upgrade is almost priced in,” Khan said of the S&P’s potential ratings change, adding that there will be downside to the asset class if it doesn’t happen. “We are always looking for what is priced in versus what could happen.”

--With assistance from Catherine Bosley, Pearl Liu, Myriam Balezou and Lorretta Chen.

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