Fixed-income investors can look overseas when it comes to value propositions in the bond markets as emerging markets debt has become more attractive, according to TCW Group Inc portfolio manager Penny Foley.

“We’re trading at about 10 basis points wide of fair value,” said Foley at the Reuters Global Investment 2019 Outlook Summit in New York. “I don’t think there’s another fixed-income class I can think of that is trading anywhere near fair value. Most of them are trading expensive to their long-term averages.”

October’s sell-off in U.S. equities is spilling over into November after a short-lived midterm election rally with the Dow Jones Industrial Average swallowing a 600-point loss on Monday and a 300-point loss thus far in Wednesday’s trading session.  October’s sell-offs also hit the emerging markets space, leaving investors to wonder when the strategy for value-hunting in EM turns into outright avoidance.

However, if the U.S. Dollar experiences a reversal of fortune, after rising for much of 2018, this could be the trigger event to bolster emerging markets with respect to local currencies in 2019.

“Local currency could be the surprise for 2019,” said Foley.

Opportunities in Brazil

One place where Foley sees opportunity is in Brazil. The newly-elected president Jair Bolsonaro signaled a shift from traditional politics, but will this translate into an improved economy that could be the tide that lifts all boats in emerging markets?

Foley seems to think so.

“He has a social agenda that is very unsettling, and I find that difficult,” said Foley. “On the other hand, he has I think some strong and right thinking around economic issues, and has the support of folks who think these things through.The big question is implementation.”

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