When it comes to emerging-market sovereign debt, Man Group is going local.
The world’s largest publicly traded hedge fund is finding better value in local-currency bonds compared with their hard-currency equivalents, which have become a crowded trade. Local debt has turned a corner in 2017, providing more than double the returns of dollar-denominated developing-country bonds after delivering losses over the past three years, Bloomberg Barclays indexes show.
“On the hard currency side, we think there is a lot of complacency,” said Lisa Chua, portfolio manager for emerging-market debt for Man GLG, a unit of London-based Man Group. “On the local-currency side, medium term we think there is value there. We think a lot of risk around Trump has been priced in over the medium term.”
Man Group joins BNP Paribas Investment Partners and JPMorgan Chase & Co’s private bank division in turning bullish on local-currency credit. Investors have pumped $4.5 billion into domestic debt this year, EPFR Global data show, as they look past the threat of US policy tightening and President Donald Trump’s protectionist rhetoric. Overseas funds have rapidly boosted their overweight positions in Brazil and Russia the past six months amid gradual gains for Indonesia, according to a Goldman Sachs Group survey.
Analysts are forecasting gains for more than half of the emerging-market currencies tracked by Bloomberg by the end of this year, and BNP Paribas Investment Partners also predicts the dollar will depreciate against most of the developing-nation currencies in 2017. The Federal Reserve raised its benchmark lending rate a quarter percentage point last week, without accelerating the timetable for future increases.
The “Fed’s rates hikes are already priced in, so there’s no additional strength for the dollar, and emerging-market currencies look very cheap at the moment,” said Jean-Charles Sambor, deputy head of emerging-market fixed income at BNP Paribas Investment Partners. “The bull run of the dollar for the last couple of years — this trend might have been over at the end of 2016.”
In Asia, BNP Paribas Investment Partners likes Indonesian and Indian local sovereign credits, as well as some local-currency bonds from banks or quasi sovereigns, such as in Russia. Sambor also expects Brazil’s real and the Mexican peso will appreciate further and lure inflows into those markets in the longer run.
“EM has been sold off for many years and people have very light positions on EM bonds,” Ben Sy, head of fixed income, currencies and commodities at JPMorgan’s private-banking unit in Asia. “I am sure some funds will go to local currency because it is still one of the less crowded asset classes and the carry is still very decent.”
© 2017 Bloomberg