BlackRock Says Join ‘Great Migration’ to Emerging-Market Debt

  • Brexit confirms EM bonds is best haven in negative rate world
  • Choose stable hard-currency debt over volatile local currency

The world’s largest asset manager is green-lighting a shift of capital from developed nations where interest rates are low, or even negative, to pursue emerging-market bonds for better returns.

The U.K.’s vote to leave the European Union has accentuated the global scarcity of yield, which is the main driver behind the tightening risk premium in developing-nation bonds, BlackRock Inc. said in a research note Monday. The firm called the end of a three-year bear market for the asset class in February, citing a shift in U.S. dollar strength fueled by monetary policy divergence in developed markets and a stabilization of commodity prices and emerging currencies.

“We now finally see EM meeting the necessary conditions to receive what we expect to be a great migration of money fleeing the negative rates in developed markets,” BlackRock emerging-market debt managers including New York-based Pablo Goldberg and Sergio Trigo Paz in London, wrote in the note. “After being mostly defensive about the asset class since 2013’s ‘taper tantrum,’ we believe now is the time for investors to consider warming up to EM risk.”

Developing-nation debt has rallied this year as commodity prices stabilized, China’s economic outlook improved and currency volatility subsided. Dollar-denominated bonds have returned 12 percent since the end of 2015, while local-currency securities gained 15 percent, according to JPMorgan Chase & Co. indexes. Trading volume increased 6 percent to $1.3 trillion in the first quarter of this year as a more dovish Federal Reserve, China concern eased and higher oil prices led to asset-price recovery, according to EMTA, the New York-based association for emerging-market debt trading and investment.

BlackRock also said:

  • Economic growth in emerging markets is showing signs of improvement and external balances are much stronger
  • Hard-currency debt is likely to provide more stable income stream than local currency counterparts
  • Investors seeking income stability and total return across hard- and local-currency debt can opt for an unconstrained emerging-market strategy