BlackRock sees shift to emerging-market bonds resuming in 2017

[LONDON] Rising US interest rates, potential trade curbs and a global bond rout aren't enough to throw BlackRock Inc's Sergio Trigo Paz and Pablo Goldberg off their conviction that emerging-market notes are a buy.

The money managers, who last year correctly predicted investors would flock to developing-nation debt to escape near-zero yields in advanced economies, say the "great migration" of capital will resume this year as soon as President-elect Donald Trump's policies become clearer.

BlackRock's forecast would see emerging-market sovereign bonds shake off a rout that has handed investors losses of 3.4 per cent since Mr Trump's election in November, pushing yields up toward 5 per cent.

The selloff has increased the appeal of the debt as an escape from negative yields in much of the developed world, while fundamentals in developing countries continue to improve, according to Mr Trigo Paz and Mr Goldberg of BlackRock's emerging-market debt team.

"We see emerging-market debt in a strong position in 2017," Mr Trigo Paz and Mr Goldberg wrote in a note to clients Tuesday.

"Global yields remain low compared with pension liabilities."

Money poured into emerging-market bond funds for 15 straight weeks after the investors made their great migration call on July 18, according to EPFR Global data.

The tidal wave was only reversed when Mr Trump's election victory pushed up global bond yields on bets his infrastructure spending plans will fuel inflation in the US.

While Mr Trump's election has increased the headwinds for developing nations, they will also reap some benefits because infrastructure spending will improve the outlook for commodity producers, according to Mr Trigo Paz and Mr Goldberg, who expect emerging-market sovereign debt to return more than 4 per cent in 2017.

"We think there are reasons to potentially keep an upbeat view of emerging-market debt under the new landscape," the money managers said.

BLOOMBERG