Emerging Debt Still Looks Good to Some Big Investors

(Bloomberg) -- A stronger dollar, rising interest rates and the prospect of a drop in global trade aren't enough to deter some of the world's biggest asset managers from buying emerging-market bonds.

Amundi Asset Management, Schroder Investment Management and Morgan Stanley are among those predicting a rebound following the post-U.S. election pullback that roiled the market for debt sold from developing nations.

Reasons for their optimism range from the conventional — such as improving fundamentals — to the more unusual: with political risk on the rise in developed regions such as the U.S. and Europe, emerging markets may become the more dependable investments.

"EM isn't dead, it's just resting," analysts at Morgan Stanley led by New York-based Gordian Kemen said in a year-ahead outlook note published on Nov. 27. Attractive valuations and a cushion against Federal Reserve tightening help create an opportunity to shift from developed-market debt, they said.

Here are a few other reasons to be optimistic:

LESS POLITICAL RISK

With elections in France and Germany, the inauguration of Donald Trump and Britain potentially giving notice to exit the EU, 2017 has no shortage of global headwinds. Money fleeing heightened political risk in developed countries may find a home in developing nations as it did during the European debt crisis in 2010-2012, according to strategist Abbas Ameli-Renani at Amundi, Europe's biggest asset manager.

YIELD HUNT

Yields on emerging-market dollar bonds have climbed for four straight weeks since Donald Trump's election victory increased bets that the Fed will raise interest rates.

Now that the market is close to pricing in a rate increase in December and two more next year, emerging-market bonds, yielding more than 5% on average, are starting to look attractive again, James Barrineau, a money manager at Schroders, said in an e-mailed research note on Nov. 28.

DECLINING DEFAULTS

The default rate in emerging-market high-yield bonds will more than halve in 2017 to 2.1% after reaching a seven-year high this year, JPMorgan Chase said in a research note published Nov. 23.

IMPROVING FUNDAMENTALS

Emerging-market fundamentals are in much better shape now than they were three years ago during the so-called taper tantrum. Economic growth is picking up this year for the first time since 2010, current-account shortfalls in countries like India and South Africa have receded and foreign reserves have increased.

"In general emerging markets have stronger current-account balances and a lower reliance on external debt, rendering them less susceptible to external shocks in the global economy than in the past," ETF Securities analyst Morgane Delledonne said in an e-mailed research note.

UNDER-INVESTED FUNDS

Some of the world's biggest money managers still have a lot of room to increase their exposure to emerging-market bonds. While global funds crept back this year, developing nations still make up less than 11% of their portfolios on average, three percentage points below the peak of the past eight years, according to Morgan Stanley.

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