Emerging-market bonds will outperform developed-nation debt over the next three to four years as developing countries allow their currencies to appreciate, said Jerome Booth of Ashmore Investment Management Ltd.
Fear of losing exports has been among the reasons China and other countries haven’t allowed their currencies to appreciate, said Booth, who helps oversee $33 billion in emerging-market assets as Ashmore’s head of research. Eventually a country such as India, with a relatively closed economy and building inflationary pressure, or a competitive exporter, such as South Korea, may lead a wave of revaluations, he said.
Booth recommends emerging-market dollar bonds in the near term, and local-currency debt longer term, as those nations are less indebted than Western countries, he said. Eighty percent of the return on locally denominated debt is likely to come from currency gains over the next three to four years, he said.
“Local-currency debt, at the short end in particular, I would say is arguably the safest asset class in the world, safer than gold, safer than Treasuries,” Booth said. “Therefore I want Korea won and I want rupee in the portfolio early. But once they start moving then I want Malaysia, I want Indonesia, I want lots of other countries in Asia, and I want obviously Brazil, Colombia, Peru.”
The People’s Bank of China last month indicated it would abandon the 6.83 yuan peg to the dollar adopted during the global crisis to shield exporters. While the yuan has gained 0.7 percent against the dollar so far in 2010, other major emerging currencies including the Brazilian real, Russian ruble, Indian rupee and South Korean won have declined.
Emerging-market economies have less than half as much public debt as a proportion of output as developed nations, according to the International Monetary Fund.
Investors may have to wait for a year or longer for big moves in emerging-market currencies, Booth said. India’s wholesale-price index jumped 10.55 percent in June after climbing 11.23 percent in April, the most in 19 months, a report showed earlier this month.