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BNY Mellon's Standish surveys the emerging opportunities in local currency-denominated bonds

ER - Analyses de marchés
• Caution on the Eurozone is wise until there is greater policy clarity, says Standish’s Kozhemiakin
• Thus far, a number of emerging economies have remained largely unaffected by Europe’s economic travails
• However, risky asset returns are likely to remain hugely correlated to the news emanating from Europe

Alexander Kozhemiakin, head of emerging markets debt at BNY Mellon’s dedicated fixed income specialist Standish, and manager of the BNY Mellon Emerging Markets Debt Local Currency Fund, looks at attractive investment opportunities in local currency-denominated emerging market bonds.

“With the uncertainty surrounding the outcome of the Eurozone crisis, we remain somewhat cautious about our positioning in the region and will continue to do so until we get more clarity on policy measures,” says Kozhemiakin. “At the same time, the sell-off in emerging currencies has made valuations relatively compelling on a medium- and long-term horizon. Furthermore, we believe that the deteriorating outlook for global economic growth should result in a lower inflationary environment, which could be supportive of local bonds. In addition, we believe that the risk of unanticipated new bond issuance (outside the planned schedule) is low as most emerging economies seem to be in a good fiscal position. Meanwhile, emerging market local currency bonds are helped by the low interest rate environment in the developed economies (with the exception of the peripheral countries in the Eurozone). However, it seems inevitable that risky assets returns will remain highly correlated to news coming from Europe,” he adds.
“To date, we believe that up to now the longer term growth prospects and public debt sustainability of emerging economies have remained largely unaffected by the economic problems in the single currency area,” he says. “Currencies in a few countries have reached quite attractive valuation levels; this includes the Turkish lira, the South African rand, the Brazilian real and the Hungarian forint but we are looking for more clarity on Europe before we decide to take a more aggressive stance in these currencies. In the case of Hungary, we see a better risk/reward trade in being long the Polish zloty. We also like the Mexican peso versus the Peruvian nuevo sol and the Colombian peso. The Mexican peso is undervalued given relatively robust fundamentals, and we suspect that it has sold off in large part because it is a very liquid currency,” Kozhemiakin explains.
“On the duration side, we still like Mexican duration. In keeping with our view on the currency, fundamentals are favourable, for instance with regard to debt dynamics,” he says. “At the same time, we expect that global disinflationary forces combined with subdued domestic demand in Mexico will have a dampening effect on inflation in the country. We see similar dynamics in South Africa.
“We continue to believe that the potential returns offered by the average nominal yield above 6% in local currency bonds, along with the potential for further currency appreciation, make emerging markets local currency denominated debt an attractive investment opportunity,” concludes Kozhemiakin.

Headquartered in Boston, USA, Standish is a specialist active fixed income manager investing in global fixed income markets and across the full credit spectrum.

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