A stronger dollar, rising U.S. yields and geopolitical tensions have sent plenty of investors bolting from emerging markets. Then there’s Aberdeen Standard Investments and Goldman Sachs Asset Management.
Aberdeen Standard Investments, which oversees about $770 billion, took advantage of the recent selloff to increase its holding in the Russian ruble, South African rand and Indonesian rupiah. Goldman Sachs’ asset management unit, which manages more than $1 trillion, increased its position in emerging-market debt as it viewed the recent weakness as excessive.
With the exception of Argentina and Turkey, the pullback has little to do with developing nations’ fundamentals as growth remains solid, according to Ashmore Group.
“We see nothing in the recent unwind of emerging-market positions which in any way changes the benign outlook for EM,” said Jan Dehn, the head of research in London at Ashmore, which manages about $77 billion of developing-nation assets. “This is the time to buy EM, not to sell.”
A Bloomberg currency index that measures carry-trade returns from eight emerging markets, funded by short positions in the dollar, declined in the last four weeks. A gauge of developing-market currencies is near its weakest level this year, while equities extended losses after the Treasury 10-year yield climbed above 3% to levels last seen 2011 on Tuesday. The Bloomberg Barclays local-currency government debt index has fallen in the last five weeks.
The dollar’s recent strength was fueled largely by speculative investors covering their short dollar positions — and “not due to a change in investor perception of the macro backdrop,” Goldman Sachs Asset Management said in a note. “Recent relative underperformance in emerging-market debt appears excessive and we don’t think broad-based weakness is warranted given strength in select EM markets.”
Global economies continue to grow, supporting currencies and other assets outside of the U.S. including currencies, according to the asset manager. Emerging-market currencies are also beginning to look undervalued based on traditional valuation metrics such as interest-rate differentials, it said.
Morgan Stanley Investment Management also agrees.
“We believe that the EM fundamentals generally remain strong and this period of underperformance will end and EM assets will once again begin to outperform,” it said in a note received Wednesday.
Kenneth Monaghan, Durham-based co-director of high yield at Amundi Pioneer Asset Management is taking rising U.S. yield as a reflection of growth, not a risk. He expects the benchmark U.S. Treasury yield to rise to no more than 3.25% by the end of the year, unless there’s a significant pickup in either inflation or GDP growth.
“People have set levels on Treasuries; it’s kind of like if you go over this cliff the world ends,” Monaghan said in an interview in Singapore. “I don’t buy into that theory. If it’s reflective of greater growth for the economy and greater inflation, the high-yield market would absorb it.”
So where are the bargains?
- Goldman Sachs Asset Management is overweight currencies from oil-exporting economies that have underperformed relative to the commodity’s recent rally. This includes the Russian ruble, which weakened excessively following the U.S. sanctions
- Elsewhere, “orthodox policymaker actions,” including monetary tightening, fiscal consolidation and engagement with the International Monetary Fund for a credit line, will help alleviate pressure on the Argentine peso, it said. Argentina’s currency has tumbled about 22% this year, the worst performer in developing markets
- Aberdeen Standard Investments favors the ruble as higher oil prices strengthen Russia’s “already solid” balance of payments, said Edwin Gutierrez, the London-based head of emerging-market sovereign debt
- The manager had been waiting to buy the rand, and a six-week slump provided the opportunity
- It also snapped up some rupiah bonds as the yield curve has probably priced in the prospect of policy tightening by Bank Indonesia; the majority of economists surveyed by Bloomberg predict an interest-rate increase on Thursday as the rupiah declined to a 31-month low
- While emerging markets have priced in the prospect of higher U.S. rates, the “problem more of late has been a strong dollar”
Others are just being tactical. Saed Abukarsh, co-founder of Ark Capital, a Dubai-based hedge fund, recently reduced his wagers against the Mexican peso, Turkish lira and ruble, which were among the hardest hit in the last six weeks. But he plans to add to his emerging-market shorts again should the dollar retreat. The market hasn’t priced in “steady growth” in the U.S. and the Treasury 10-year yield will grind higher to 3.5%, he said.
“The argument for a firmer dollar still stands,” Abukarsh said. “But I think now one has to be tactical as the dollar is likely to enter into a consolidation phase in the short term.”