One of last year’s best wagers in emerging-market debt is getting a fresh boost from bets the Federal Reserve will finally begin cutting interest rates.
Optimism is sweeping through domestic bond markets as investors wager that the Fed will soon start lowering rates, with Wall Street set to scour this week’s meeting for clues on timing. Alongside a weaker dollar, a potential US pivot would help coax central bankers in emerging markets to ease — resulting in a potential windfall for holders of local-currency debt.
To Grantham Mayo Van Otterloo & Co., that means a “once-in-a-generation” opportunity in local bonds. Latin American domestic debt is already fresh off its best annual rally since 2009 thanks to early and aggressive monetary policy in the region.
“Local debt is attractive with a rich dollar, cheap EM currency valuations, attractive yields and the ongoing disinflation process — no matter what the Fed does or says,” said Victoria Courmes, a money manager at GMO. “Hints at when the easing cycle is likely to start in the US could be a catalyst for a weaker dollar and strong performance from EM local debt.”
GMO is among a growing cohort of global money managers — from Neuberger Berman to Vontobel Asset Management and JPMorgan Chase & Co. — that tout early 2024 as an important moment for the asset class.
Even though policymakers in nations such as Brazil and Chile are further along in their monetary cycles than peers in the US and Europe, a potential Fed pivot still stands to invite further easing. Traders currently price in a less-than-50% chance that US officials begin easing at the March gathering.
If the eventual pivot comes alongside a decline in the greenback, central bankers in emerging markets would be less likely to risk local-currency depreciation by also cutting rates. For traders, that scenario offers a unique opportunity.
As JPMorgan strategists including Anezka Christovova see it, inflation is coming down and growth should be resilient in the first half of the year. That leaves the case for local bonds intact as the Fed moves closer to lowering borrowing costs — even though emerging assets are sputtering at the start 2024, they wrote in a Jan. 19 note.
Read the full article here by Carolina Wilson, Zijia Song of Bloomberg News, Advisor Perspectives
