NEW YORK (Feb 15): As emerging-market investors begin to fret about the outlook for economic growth, one asset class may prove to be more resilient to a potential downturn — global bonds.
After posting the best month in a decade, international debt issued by developing nations extended gains in February. By contrast, the rally in local bonds began to run out of steam on speculation an economic slowdown could make room for central banks to cut interest rates, weakening currencies.
The Federal Reserve’s shift to a more dovish stance has eased pressure for tighter monetary policy worldwide. India unexpectedly reduced borrowing costs this month in an attempt to spur demand. The swap market indicates that traders see the next move in Mexican and Turkish rates to be a cut, with policy makers in Brazil, Malaysia, Thailand and China staying on hold over the next six months.
“We favor hard currency,” said Jim Barrineau, the New York-based head of emerging-market debt at Schroders. With US Treasuries remaining below 3%, “the search for dollar yield income will accelerate.”
Barrineau recommends buying single-B rated countries with stable fundamentals, such as Argentina, Lebanon and Ukraine. Ecuador is a good bet, assuming it signs a credit accord with the International Monetary Fund, he said.
Emerging-market sovereign dollar bonds fell 4.3% last year, according to a JPMorgan index, the worst decline since 2013. In January, those same bonds returned 4.4%, the highest monthly gain in a decade.
If growth falters, both local and hard currency bonds would likely sell off because of reduced risk appetite, said Per Hammarlund, the chief emerging-markets strategist at SEB SA in Stockholm. Yet hard-currency bonds should perform better than their domestic peers given the heightened concern about local currencies, according to him.
Emerging-market global bonds would also be a better investment than their local counterparts if the US economy proves stronger than expected, said Samy Muaddi, a Baltimore-based money manager at T. Rowe Price Group.
“While we’re constructive on local-currency EM debt in the near term, there’s risk the Fed hiking cycle gets reengaged in the back half of 2019 pressuring EM currencies,” Muaddi said. “This risk would be particularly acute for those countries who maintain a loose monetary policy stance.”