- Asset manager favors Brazil, Russia, Indonesia bonds
- Fed to delay rate increase due to political risks, Amundi says
Europe’s largest fund manager overseeing $1.1 trillion plans to put more money into emerging-market debt, which it says stands to benefit as the Federal Reserve delays raising interest rates until 2017.
Amundi Asset Management favors higher-yielding bonds in Brazil, Russia and Indonesia, Eric Brard, global head of fixed income, said in an interview in Singapore on Monday. The Fed will be cautious about tightening monetary policy due to a combination of the uncertainty from Britain’s vote to leave the European Union, the U.S. presidential election, a referendum in Italy, as well as next year’s elections in France and Germany, he said.
Emerging-market debt funds attracted record inflows in the week ended July 20, according to EPFR Global, helping take this year’s gain in a Bloomberg index tracking dollar sovereign notes to more than 12 percent. That already puts the gauge on course for its best annual performance since 2012. U.S.-currency bonds in developing nations offer an average yield of 4.38 percent, compared with negative rates in Japan and Germany.
“The prospect of interest-rate hikes being pushed back to 2017 is in favor of emerging markets,” said Brard, who is based in Paris. “We have very low interest rates, or negative interest rates in some markets, which means we are going to see continuous transfers of money between the lower-yielding and higher-yielding markets.”
While futures traders have increased bets for a Fed rate increase by December after retail sales and housing data beat forecasts, that probability is still below 50 percent, compared with 56 percent by March.
As the Fed tightening window is pushed back, local-currency emerging-market debt has returned 4.8 percent in dollar terms this year. That’s also poised to be the best since 2012.
Amundi is favoring Brazil’s global bonds with the nation in political transition under acting president Michel Temer, who took over in May, while Dilma Rousseff faces an impeachment trial. Brazil’s dollar bonds have returned about 23 percent this year, with the 10-year debt yielding 4.80 percent, according to a JPMorgan Chase & Co. index and Bloomberg Bond Trader data.
“The country is going through a change in terms of government; the situation is set to improve,” said Brard.
The asset manager also likes both dollar and local-currency bonds of Russia and Indonesia. Russia, the world’s biggest energy exporter, is set to benefit from the turnaround in commodities, while Indonesia is poised for an improvement in growth and has a positive currency outlook, he said. Ten-year local-currency bonds of Russia and Indonesia yield at least 7 percent, data compiled by Bloomberg show.
“We have an accumulation of events that create quite a lot of uncertainty at the moment,” said Brard. “We will still experience in the coming months and years quite active and very accommodative central banks, which in turn translates to lower interest rates for an extended period of time. So the need for investment output is very strong.”