(Bloomberg) — As hopes of a turnaround in monetary policy dash in the U.S. and Europe, asset managers from Goldman Sachs to Citigroup see rate cuts in emerging markets as a key investment theme in the second half of 2023. are advertising.
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Developing country local currency bonds have already outperformed U.S. Treasuries, with average risk premiums falling to their lowest levels in a decade. Goldman Sachs Group is therefore advising clients to lock in current yields in Indonesia, Israel and South Africa through interest rate swaps, and Citigroup is also recommending similar deals in India, South Korea and Brazil. . HSBC Holdings favors long-term bonds, especially in Latin America.
This optimism comes as there is growing evidence that emerging economies are overtaking rich countries in reaching peak inflation and final interest rates. A growing number of developing countries are pausing rate hikes, including Taiwan, India, Indonesia, Poland and Mexico. Hungary also cut interest rates, signaling further easing, and Brazil’s central bank announced a possible rate cut in August.
“Emerging market central banks are now reaping the benefits of rising inflation expectations much faster than their developed counterparts,” said Paul Greer, money manager at Fidelity International. “Until recently, we felt that emerging market central banks would wait until the Federal Reserve gave the go-ahead to ease monetary policy before starting to cut rates. No, I think this will happen.”
It is a combination of high nominal borrowing costs, low inflation and low currency volatility that allows developing countries to move quickly to cut rates. The Citi Emerging Markets Inflation Surprise Index fell in 11 of the 12 months through May, showing how price pressures are weaker than expected. Unlike the United States and Europe, countries such as Indonesia and Thailand have kept consumer price increases within their target ranges, and Brazil has just kept up the momentum.
“Many emerging markets have been much more aggressive in raising policy rates and never believed inflation to be ‘temporary,'” said Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon Investment Management. We weren’t, but now we’re giving investors a real yield buffer.” .
Interest rate swaps between floating and fixed rates, or vice versa, are the first destination for wealth managers re-entering the dovish theme after two years of hawkish moves around the world. It’s becoming
Goldman Sachs said investors would have to agree to receive fixed interest rates in rupiahs, shekels and rands and pay variable interest rates for five years. So-called receiver deals should focus on South Korea’s two-year interest rate on hopes the Bank of Korea will begin an easing cycle in October, according to Citigroup. We also recommend a two-year receiver trade on the India-Brazil swap. Morgan Stanley supports Colombia and Brazil.
Some investors choose the bond route, preferring to hold long-term securities that are attractive in a falling interest rate scenario. HSBC recommends debt in Brazil, Mexico, Indonesia, South Korea and the Czech Republic. Disinflation is accelerating in these countries and will be reflected in yields. Fidelity’s Gurría said his top contenders are Brazil, Mexico, Colombia and Peru, as Latin America is at the forefront of this cycle.
A weakening US dollar and plummeting currency volatility have encouraged investors to bet on local currency assets. An index of carry trades for eight emerging market currencies gave investors a return of nearly 5% in the first half, the highest since 2017.
However, profits are concentrated in Latin America, with investors betting on currencies such as the South African rand and the Chinese yuan with losses. Strategists say bets on rate cuts in the second half should be similarly selective. Latin America and emerging Asia are the favorite regions of most wealth managers.
“While advanced market policymakers came under fire during this inflation shock, emerging market policymakers emerged with credibility,” said Neil Shearing, group chief economist at Capital Economics, in a note. ‘ said. “This will be remembered as a crisis in which policymaking in emerging economies matured.”
what to see
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June’s China Goods Manufacturing PMI will be watched as a clue as to whether the outlook will continue to expand or show contraction.
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Indonesia, South Korea, the Philippines and Taiwan will release headline inflation figures for June, but inflation slowed last month.Pakistan, Mexico, Chile, Turkey and Hungary will also release inflation figures
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Thailand’s parliament will convene on July 3 for the first time since the May 14 election, with lawmakers expected to vote for a new prime minister in the days and weeks thereafter.
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Malaysia is set to announce a rate decision on Thursday, with policymakers in Sri Lanka and Poland also due to announce rate decisions on the same day, after policymakers surprised investors with a rate hike in May.
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