Macroeconomic headwinds like rising interest rates and inflation have stifled a comeback for emerging markets (EM). However, more firms are becoming bullish on EM bonds again.
Reuters reported that Morgan Stanley is going against the bearish gain that EM assets were experiencing the past few years thanks to a rising dollar amid central bank tightening.
“We upgrade our stance on EM local currency bonds to bullish, where we have held a neutral stance for much of the year,” said Morgan Stanley strategist James Lord in the report.
The capital markets are hoping that a rate pause by the U.S. Federal Reserve will be the first step in a decreased pace of rate hikes. This should be a boon for a fixed income market that’s been under heavy pressure, especially in 2022 as rate hikes accelerated.
“EM rate cuts are on their way, ahead of the Fed,” added Lord.
“Already, carry and bond price gains have delivered for investors this year even if FX has not.”
Morgan Stanley’s bullish turn was also joined by JPMorgan. Reuters noted that the global investment firm shifted its “market weight” rating on EM local bonds to “overweight.”
“We prefer EM local to hard currency bonds for 2H23,” noted Luis Oganes, head of global macro research at JPMorgan. “We are OW (overweight) across all regions and long duration should continue to perform as the beginning of EM cutting cycles approaches.”
Emerging market central banks had been quick to raise rates in 2021, frontrunning major peers such as the U.S. Federal Reserve and the European Central Bank.
Emerging Markets Rate Cuts Already Appearing
Hungary and Uruguay have already showed early signs with monetary policy easing. If other EM countries follow suit, it could prop up the Vanguard Emerging Markets Government Bond Index Fund ETF Shares (VWOB).
VWOB seeks to track the performance of a benchmark index that measures the investment return of U.S. dollar-denominated bonds issued by governments and government-related issuers in emerging market countries. The fund employs an indexing investment approach. It is designed to track the performance of the Bloomberg Barclays USD Emerging Markets Government RIC Capped Index.
As of April 30, the fund is well-diversified with over 760 holdings to mitigate concentration risk. Additionally, the fund comes with a 0.20% expense ratio.
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