JPMorgan Finds Remedy to QE Withdrawal in Next Easing Candidates

  • Russia, Brazil, Indonesia on easing paths as Fed hikes loom
  • Emerging nation local bonds still pay 4 ppt premium to G7

A bond rally fed by a decade of stimulus may be losing its legs in the developed world, but in some of the biggest emerging markets, easing is just getting started.

As the last days of near-zero Federal Reserve rates rattles global markets, JPMorgan Chase & Co., Pacific Investment Management Co. and Societe Generale SA are touting the bonds of countries riding a wave of stimulus, this time of their own making. Their top picks are Brazil, Indonesia and Russia, where policy makers are forecast to deliver some of the biggest rates cuts over the next year.

The prospect for monetary easing will help engineer bond rallies in local markets after record inflows brought yields on developing-nation debt to the lowest in at least six years last month. At 4.29 percent, they’re still almost four percentage points higher than the average for Group of Seven nations, according to Bloomberg indexes.

“We like the high-yielding part of emerging-market local bonds because they have fundamental support from falling inflation and central banks which are starting or in the middle of easing cycles,” said Jonny Goulden, who heads local emerging-market debt research at JPMorgan in London. “Even if the Fed is hiking slowly, arguably Brazilian policy rates and Russian policy rates will be coming down as inflation falls in these countries.”

JPMorgan advises clients take more exposure than benchmarks suggest to local currency bonds of Brazil, Colombia, Russia and Indonesia. Societe Generale strategists also recommend local-currency government bonds of Russia and Brazil, as well as India, and dollar-denominated notes of Brazil, Colombia and Indonesia.

Russian inflation has slowed to the lowest in more than two years, giving the nation’s central bank the leeway to cut its benchmark 50 basis points to 10 percent when it meets Friday, and a further 200 basis points by the end of September 2017, according to Bloomberg surveys.

Brazilian policy makers are also projected to start cutting their key rate from 14.25 percent, where they’ve held it for more than a year. By the end of next year, economists see 300 basis points of rate cuts in response to a slowdown in consumer price growth by almost half.

“We like the story in Brazil where the central bank is looking for the right conditions to cut rates,” said Lupin Rahman, portfolio manager for emerging markets at Pimco in London.

Bonds of Argentina, Brazil and Indonesia are “top picks” for Viktor Szabo, a money manager who helps run $11 billion of emerging-market debt at Aberdeen Asset Management in London.

“Further weakness would create an opportunity to top up, but we are far from those levels,” Szabo said.

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