Hemant Baijal, Portfolio Manager of our Emerging Market Local Debt Strategy, says now is an opportune time to invest in emerging market (EM) local currency debt.
According to Hemant, EM fundamentals are stronger and valuations are compelling, despite recent market turmoil in Argentina and Turkey. Given our view that global growth has peaked, in part because of current EM weakness, we believe that improving domestic fundamentals in some EM countries and a possible fiscal stimulus in China will offset the effect of tariffs. As a result, Hemant says we expect the current slowdown in EM countries, in the aggregate, will abate by the second quarter of 2019.
Among the other reasons why Hemant believes EM local currency debt is a timely investment are:
- EM assets are at historically cheap levels relative to developed market assets; and
- EM local currency bonds offer real yields that are at, or close to, 15-year highs compared with developed market real yields.
Furthermore, in countries where central banks have raised rates, such as India, we see value in short-term interest rates. In countries such as South Africa, where central banks have not fully tightened, we see value in long-term bonds, particularly if the yield curves are very steep. Similarly, Hemant notes that EM currencies are back to levels last seen in 2015, near the U.S. dollar high.
We believe the combination of these factors and trends make now an appropriate time to consider investing in EM local fixed income.
Fixed income investing entails credit and interest rate risks. When interest rates rise, bond prices generally fall, and the value of the portfolio can fall. Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes, regulatory and geopolitical risks. Emerging and developing market investments may be especially volatile. Investing significantly in a particular region, industry, sector or issuer may increase volatility and risk.
The mention of specific countries, currencies, securities, issuers or sectors does not constitute a recommendation on behalf of OFI Global.