Pictet: Sentiment shifting in favour of emerging markets

“The risk-return profile of emerging market currencies and local currency bonds continues to improve in the wake of their protract-ed sell-off. We have consequently raised our exposure to local currency emerging market debt to overweight from neutral while reducing our stance on their USD-denominated counterparts to underweight. A number of developments justify this move.”

“Valuations of emerging market currencies have fallen to a point where they are now starkly at odds with such economies’ fundamentals. Emerging currencies are, on average, trading at almost two standard deviations below their equilibrium level (which takes into account a country’s net foreign asset holdings, inflation rate and its relative productivity).”

“Local currency bond yields have climbed in recent months – quite steeply in some cases – hence, the asset class has acquired some extremely positive characteristics. Such yields are now among the highest of all global fixed income classes, yet their duration is among the lowest (only global high-yield bonds offer a lower duration). In a period likely to see higher US bond yields, that makes for an attractive combination, in our view.

“From a technical standpoint, the trends are also positive. Investment outflows from local emerging debt markets have eased in recent months while anecdotal evidence shows institutional investors are beginning to add to their positions in the asset class. Our preferred markets are Brazil, where valuations are attractive, and China, which we believe will benefit from what we see as an imminent easing in monetary policy.”

Die vollständige Mitteilung im pdf-Dokument