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.”
The Brazilian economy has been slogging its way to a recovery after it experienced its worst recession to date as unemployment levels remain high with double-digit figures and the country is drowning in public debt–equal to 74% of GDP.
Source: tradingeconomics.com
While the annual GDP growth has posted positive gains as of late, it’s still not at a level where economists are optimistic about the future growth prospects. While the country is in the midst of a presidential election, the ideal situation to address Brazil’s current financial woes is to elect a leader who is market-friendly to help stymie the issues by effecting policies that favor economic expansion and growth.
Bolsonaro is inheriting a bevy of problems he must address during the course of his presidency and the faith of Brazil’s populace will hinge upon his success. Of course, Bolsonario’s biggest task is to help extract the country from its current economic doldrums, but his election is perceived by market experts as one that leans toward the benefit of the country’s capital markets.
October Saw Flight to Treasury Debt
Investment firm BlackRock recently released their latest global exchange-traded product (ETP) report that showed more investment capital going overseas to countries like Japan and China during the month of October–a move as a result of that month’s massive sell-offs in U.S. equities.
One notable highlights in the report showed that fixed Income flows were mixed as a result of rising interest rates and languishing U.S. equities. However, U.S. Treasury fund flows amassed $5.2 billion, while outflows of $2.4 billion resulted in high yield and $2.7 billion from multi-sector bond funds.
Fixed-income ETFs to consider that incorporate positions in U.S. Treasury funds include the iShares Interest Rate Hedged Corp Bd ETF (NYSEArca: LQDH) and the iShares Interest Rate Hdg Hi Yld Bd ETF (NYSEArca: HYGH).
HYGH seeks to mitigate the interest rate risk of a portfolio composed of U.S. dollar-denominated, high yield corporate bonds. HYGH seeks to achieve its investment objective by investing, under normal circumstances, at least 80% of its net assets in U.S. dollar-denominated high yield bonds, in one or more underlying funds that principally invest in high yield bonds, and in U.S. Treasury securities or cash equivalents.
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