Two of the world’s biggest banks have come out with very different takes on emerging-market debt.
Strategists at UBS AG’s wealth management unit turned bearish on U.S. dollar debt of developing nations on June 26 as the securities rallied on renewed confidence that central banks will maintain their stimulus. Meanwhile, JPMorgan Chase & Co. strategist Jan Loeys said in a report last week that the debt still offers good value compared with other options in developed nations.
The contrasting views show how difficult it is to find value in markets inflated by more than five years of easy-money policies, where everything starts to look expensive to someone. Bonds of nations such as Mexico, Turkey and Russia have returned about 9 percent this year, their biggest gain since 2009.
“We don’t think this asset class will perform as well in the second half of this year,” said Mark Haefele, who oversees the investment strategy for $2 trillion at UBS’s global wealth management units.
Investors have grown hungrier for higher-yielding assets in far-flung parts of the world, even if they’re more volatile, as yields on junk bonds have fallen to new lows.
Last year, investors fled from emerging-market debt amid panic over the Federal Reserve’s plan to curtail its monthly asset purchases. The notes lost 8.3 percent in May and June, faring worse than most pockets of the credit markets.
The hysteria has proved to be unwarranted in 2014. U.S. benchmark yields have fallen on Fed Chair Janet Yellen’s reassurances she’ll keep rates low for a prolonged period of time. The extra yield investors demand to own emerging-market government dollar bonds instead of U.S. Treasuries has narrowed 0.46 percentage point this year to 2.62 percentage points, according to data compiled by JPMorgan.
UBS’s Haefele says investors shouldn’t expect gains on emerging-market sovereign debt to continue at the same clip. The securities have benefited too much from declining Treasury yields, and the economies of developing nations haven’t improved enough to merit such demand, he said.
Instead, investors should buy U.S. high-yield or investment-grade bonds, or equities, according to the Zurich-based bank’s strategists. Junk bonds in the U.S. yield 3.48 percentage points more than government debt, down from 4 percentage points at year-end, Bank of America Merrill Lynch index data show.
That clashes with the view at New York-based JPMorgan, where analysts led by Loeys advise investors boost their allocations to developing nations across debt and equity markets. Their justification: Growth in emerging markets is stabilizing, while analysts have ratcheted back their expansion expectations for developed nations like the U.S. and Germany.
So, it comes down to picking your favorite expensive asset. JPMorgan and UBS seem to disagree on theirs.