BlackRock, Templeton say it’s time to consider emerging debt

A woman walks next to a BlackRock sign pictured in the Manhattan borough of New York, October 11, 2015. — Reuters pic
A woman walks next to a BlackRock sign pictured in the Manhattan borough of New York, October 11, 2015. — Reuters pic

NEW YORK, Feb 24 — The worst may be over for emerging- marketbonds, and it’s time to consider adding exposure, according to two of the world’s largest debt mangers.

Bond valuations already reflect low commodity prices, and the dovishness of major global central banks has made “riskier” assets more attractive, injecting a new life into the search for yield, analysts at BlackRock Inc, the world’s largest money manager, wrote in a research note yesterday.

Franklin Templeton’s Michael Hasenstab, who oversees US$125 billion (RM 527.725 billion) in assets, said negative sentiment toward developing markets has reached extreme levels, favoring countries including Brazil Mexico and South Korea.

The managers are joining a number of investors, including Goldman Sachs Asset Management, which have recommended selective buying of emerging-market bonds.

With borrowing costs at levels last seen during the global financial crisis, investors are compensated for some of the well-known challenges facing emerging markets, including lower commodity prices and slower China growth, they say.

Market positives

“It is premature to say that the weather has totally cleared” for emerging-market bonds, a team of emerging-market debt managers at BlackRock led by Pablo Goldberg and Sergio Trigo Paz wrote in a research note yesterday. 

“But with many of the market ‘negatives’ accounted for, it is time to concentrate on some of the ‘positives,’ which we see gaining strength as market drivers going forward.”

China’s economy has stabilised, and policy makers there appear to be “more comfortable with the current level” of the yuan, alleviating pressure on emerging markets, the managers at BlackRock, which oversees US$4.6 trillion, wrote. A three-year decline in developing-nation currencies is also allowing for “substantial and quick re-balancing of their domestic economies.”

Goldberg and Paz said they favor emerging-market debt which is dollar-denominated and investment grade. Local-currency bonds are also becoming “more balanced” after a three-year selloff, even though volatility remains high.

No collapse

Franklin Templeton’s chief investment officer for global macro agrees. Hasenstab, who oversees the fifth largest actively-managed fixed-income fund in the world, said the pessimistic sentiment toward emerging markets today resembles what it was during the depth of the global financial crisis, which proved to be a buying opportunity.

While opportunities are now “a lot narrower,” they are still available in countries such as Mexico, South Korea, Malaysia, Indonesia and the Philippines, Hasenstab said in a blog post. These are the countries with “solid fundamentals,” but are treated as if they were in a crisis, he said, adding that he’s avoiding Turkey, Russia, Venezuela and South Africa.

“There is a deceleration, there is a moderation, there is not a collapse,” Hasenstab said in a video on the Franklin Templeton website.

“But the markets are pricing in a collapse,” he said. “So this to us is a fantastic opportunity when you have a huge disconnect between reality and market prices.”

Goldman’s call

Emerging markets stand out in a world where more than US$7 trillion of global government debt yields less than zero.

The extra yield investors demand to hold emerging-market dollar bonds rather than US Treasuries climbed to 5.07 percentage points on February 11, the highest since 2009, according to data compiled by JPMorgan Chase & Co. Local-currency bonds yielded 6.8 per cent Monday, compared with 1.2 per cent for five- year US Treasuries and negative 0.3 for German bunds with similar maturity.

In January, Goldman Sachs’s emerging-market bond manager Yacov Arnopolin said that 2016 could be the year when developing-nation economies and currencies bottom out.

“We don’t anticipate a rapid rebound or V-shaped recovery,” Arnopolin wrote in a note. “Rather, we see EM turning the corner after three straight years of declining valuations and downward growth projections.”

Arnopolin said he favors countries of oil importers, including the Dominican Republic and Costa Rica, while staying bearish on Middle East nations.

Brazilian bonds

For Templeton’s Hasenstab, who is known for his contrarian bets on beaten-down assets including debt in Ukraine and Ireland, Brazilian securities could be his next winning wager.

Brazilian bonds are attractive because the country “appears to have a clear path” to recovery despite near-term volatility, he said. While the country has yet to improve its fiscal policy, the yields at more than 16 per cent is high enough for the risks.

“We believe investors are being compensated for those near- term risks as the country proceeds toward recovery over the medium term,” Hasenstab, who doubled his holdings of Brazilian debt to US$5.9 billion in the fourth quarter, wrote on the blog.

“Overall, we view the country as economically strong; it’s just the policy mix that needs to be corrected.”

Hasenstab’s bullishness on emerging markets in recent months has eroded his track record as one of the star money managers.

His US$53 billion Templeton Global Bond Fund has declined about 4 per cent this year, approaching the entire loss for 2015 and trailing 97 per cent of its peers, according to data compiled by Morningstar Inc Over the past decade, it has returned 6.5 per cent annually, beating 99 per cent of its peers. — Bloomberg

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