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BlackRock, Templeton say it's time to consider emerging debt
[NEW YORK] The worst may be over for emerging- market bonds, and it's time to consider adding exposure to local markets, 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 Tuesday.
Franklin Templeton's Michael Hasenstab, who oversees US$125 billion in assets, said negative sentiment toward developing markets has reached extreme levels, favoring countries including Brazil Mexico and South Korea.
China's economic slowdown has also stabilized, and policy makers there appear to be "more comfortable with the current level" of the yuan, a team of emerging-market debt managers at BlackRock led by Pablo Goldberg and Sergio Trigo Paz wrote in a research note Tuesday.
"It is premature to say that the weather has totally cleared" for emerging-market bonds, the analysts at BlackRock, which manages US$4.6 trillion, wrote. "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."
Dollar-denominated investment-grade emerging-market debt has declined to levels that historically have been a "good entry point for investors," according to the BlackRock report. The local-currency denominated bonds are also becoming "more balanced" after a three-year selloff, even though volatility remains high, they said.
The extra yield investors demand to hold emerging-market dollar bonds rather than US Treasuries climbed to the highest in more than six years this month. Brent crude fell to a 2003 low, while the slowest growth in China in a quarter century worsened the outlook for the global economy. The spread reached 5.07 per centage points on Feb. 11, a level last seen in 2009, according to data compiled by JPMorgan Chase & Co.
Since then, the Federal Reserve has toned down its hawkish message, fueling speculation that interest-rate increases in the US may take on an even more gradual pace.
A more dovish Fed will "take some steam away" from the strength of the dollar, providing a relief for emerging-market local currency debt, according to BlackRock. A three-year decline in developing-nation currencies is also allowing for "substantial and quick re-balancing of their domestic economies," the managers wrote.
Franklin Templeton's chief investment officer for global macro agrees. Mr Hasenstab, who oversees the fifth largest actively-managed fixed-income fund in the world, said pessimistic sentiment toward emerging markets today resembles what it was during the depth of the global financial crisis, which proved to be a buying opportunities.
While opportunities are now "a lot narrower," they are still available in countries such as Mexico, South Korea, Malaysia, Indonesia and the Philippines, Mr 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," Mr 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."
Mr Hasenstab, who is known for his contrarian bets on beaten- down assets including debt in Ukraine and Ireland, said Brazilian securities are attractive because the country "appears to have a clear path" to recovery despite near-term volatility.
While the country has yet to improve its fiscal policy, the yields at more than 16 per cent is high enough to compensate for the risks.
"We believe investors are being compensated for those near- term risks as the country proceeds toward recovery over the medium term," Mr 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."
Mr 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.