(Bloomberg) — With emerging markets on the brink of their worst month since 2022, TT International and AllianceBernstein are making a bold wager that this is a good time to buy.
They’re betting on beaten-down securities, like emerging-market bonds, on the view on that central banks, rather than raise interest rates, will instead have to cut them to stave off a growth shock. It’s a contrarian view that was pushed into the spotlight this week after Pacific Investment Management Co. touted “opportunities to invest against the prevailing narrative.”
“The market has priced the wrong risk,” said Jean-Charles Sambor, head of emerging-market debt at TT International Asset Management. “We’ve started to buy emerging-market credit and local bonds.”
He said he recently added Polish and Czech local-currency bonds, as well as dollar-denominated Venezuelan and Lebanese securities.
Dip-buying investors are in the minority after a bruising selloff across emerging markets. Emerging stocks have fallen about 10% this month, while average yields on local-currency bonds have risen to the highest in almost two years. Energy importing nations have seen even bigger selloffs, with bond yields jumping by 50-100 basis points in Poland, South Africa and Thailand. Some currencies have slid more than 5%.
Other investors have made similar calls, and money markets that had almost fully priced a Federal Reserve rate increase earlier in the week, have since trimmed those wagers. By Friday, they saw a less than 50% chance that a hike will materialize this year. The Fed “is biased towards offsetting recession risk and would likely tilt dovish if the oil price shock intensified,” JPMorgan Chase & Co. strategists said in a March 20 report.
Christian DiClementi, director of emerging debt at AllianceBernstein LP, said he sees buying opportunities in markets with the steepest declines. He declined to disclose specific trades.
“Initially the shock is inflationary, but the longer it drags on, the higher the probability that a supply shock turns into demand destruction,” DeClementi added.
The war that broke out on Feb. 28 upended a blistering rally that had driven stocks and local bonds to their best two-month start to a year since 2012 and 2017 respectively. It also halted a 20-week run of inflows totaling $58.9 billion into US-listed exchange-traded funds that buy emerging-market assets.
The scale of those pre-war inflows suggests there’s plenty of room for more outflows. The consensus view among investors is that emerging central banks will be forced into raising rates to guard against an oil-led inflation shock. Dollar strength may also hurt returns.
Benoit Anne, head of market insights at MFS Investment Management, says he’d prefer to wait until the worst of the volatility is past. However, he’s convinced that emerging markets are due a rebound later this year.
“Emerging markets were a victim of their own success,” Anne said. “When something does really well, then there’s a shock of this reversing.”
Aside from the prospect of preemptive rate cuts from the Fed and other central banks, he says fundamental improvements across the developing world will lure back investors keen to diversify portfolios away from US assets.
“Fiscal troubles, policy credibility shocks, they are not coming from EM anymore,” Anne said. “This is ultimately going to be a very attractive entry point to re-establish bullish positions on EM.”
–With assistance from Srinivasan Sivabalan.
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