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BLBG: Dollar Drop Has JPMorgan Betting on Local Emerging-Market Bonds
(Bloomberg) -- Confidence on a brighter outlook for developing nations has turned traders increasingly bullish on local-currency risk.
Money managers from JPMorgan Asset Management to Schroders Plc favor local notes in emerging markets over dollar-denominated bonds as currency volatility falls, commodities prices stabilize and the shine comes off the reflation trade that sent the dollar to a 14-year high at the end of last year.
Local-currency bonds have some catching up to do after 12 months in which they lost 0.4 percent, compared with 7 percent gains for developing-nation sovereign dollar securities. Research Affiliates, a sub-adviser to money managers including Pacific Investment Management Co., forecasts local notes will produce better returns over the next decade.
"It makes sense to increase exposure to local markets," said Anders Faergemann, a senior fund manager in London at PineBridge Investments, which oversees about $83 billion globally. "We may be returning to a global scenario where U.S. rates remain low and there’s less support for the U.S. dollar."
Slowing inflation has allowed central banks in countries such as Brazil and Colombia to begin deep interest-rate cutting cycles, adding to the appeal of local debt, according to Gabriela Santos, a global market strategist at JPMorgan Asset Management. Brazil’s central bank has cut the benchmark rate by 300 basis points, or 3 percentage points, since October to 11.25 percent and is expected to slash it a further 275 basis points by year-end.
Foreign investors lured by high yields poured a record 159 billion rubles ($2.8 billion) into Russia’s local-currency debt in March. Most of the inflow came in the second half of the month after the U.S. Federal Reserve laid out an unexpectedly less hawkish rate-hike outlook, Russia’s central bank said in a report on Wednesday.
A better outlook for emerging-market economies comes as investors become less bullish on the dollar. Goldman Sachs Group Inc. closed its long-dollar positioning against the euro, the pound and the Chinese yuan this week, one of its top trade recommendations for 2017, citing a slowdown in the reflationary momentum in the U.S. economy.
Declining prospects for a border-adjustment tax or a near-term U.S.-China trade war will further support emerging-market local debt, according to Samy Chaar, the Geneva-based chief economist at Lombard Odier.
Schroder Investment Management’s Jim Barrineau said this week that he prefers emerging-market local bonds as the dollar -- already down 2.4 percent this year -- likely weakens further on soft economic data, and Capital Economics published a report last month saying local notes will probably outperform overseas ones as yields are expected to rise more in the U.S. than in developing nations.
"There is a decent attempt to tackle inflation in a number of countries," said Andrew Stanners, a London-based investment manager at Aberdeen Asset Management. "In an environment where dollar strength is less likely and EM currencies appear to have stabilized, local market bonds will look attractive."