JPMorgan Sees Emerging-Market Debt in ‘Sweet Spot’ as QE3 Starts

JPMorgan Sees Emerging-Market Debt in ‘Sweet Spot’
The Marriner S. Eccles Federal Reserve building stands in Washington, D.C. Photographer: Andrew Harrer/Bloomberg

The Federal Reserve’s third round of bond buying is putting emerging-market corporate and sovereign debt is in a “sweet spot,” according to JPMorgan Chase & Co.’s Joyce Chang.

The quantitative easing, known as QE3, is reducing bond supply and prompting investors to seek higher-yielding debt from developing nations, Chang, the global head of emerging-market research at JPMorgan, said yesterday at a conference at Bloomberg’s headquarters in New York. Dollar-denominated government debt in developing countries has returned 14 percent this year as corporate securities advanced 12 percent, according to JPMorgan indexes. Treasuries gained 2.4 percent.

Emerging markets “are still in a sweet spot,” said Chang, whose emerging-market team was ranked the best by Institutional Investor. “Modest” borrowing by emerging-market governments and companies has avoided a supply glut, she said.

Pacific Investment Management Co., which oversees the world’s largest bond fund, favors local-currency bonds in Brazil, Mexico and South Africa as slower economic growth allows the countries to keep interest rates low, according to Lupin Rahman, an executive vice president at the Newport Beach, California-based company.

“My favorite investment in the emerging-market space is really the local rate space, given the much weaker global economic environment we are seeing,” Rahman said at the event.

Brazil’s real, which has lost 8 percent this year, is Pimco’s “currency of choice,” she said.

Commodity Currencies

JPMorgan’s Chang said she favors commodity-related currencies including the Russian ruble, Mexico’s peso and the real.

Alberto Ades, the head of emerging-market fixed-income strategy and global economics at Bank of America Corp., also likes the currencies as the Fed’s QE3 weakens the dollar.

Developing countries’ equities are in the middle of a “bear market” as the credit expansion in nations such as Brazil and China starts to reverse, according to Michael Shaoul, the chairman of Marketfield Asset Management.

“Emerging-market equities should be avoided in general,” Shaoul said at the event.

The MSCI Emerging Market Index has advanced 8.9 percent this year, trimming its loss since its peak in May 2011 to 17 percent. The Standard & Poor’s 500 Index of U.S. stocks has climbed 15 percent this year.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE