Currency appreciation bets have taken centre-stage in emerging bond investors' strategies for 2011 as they hope surging inflation will force central banks across the developing world to let exchange rates rise. Central banks have accelerated the pace of interest rate increases, with China hiking rates twice in six weeks and Indonesia finally kicking off its policy tightening campaign.
But with policymakers perceived to be well behind the curve on inflation, investors for the most part are bearish on emerging local currency debt. J. P Morgan data shows January was the third month of declining capital flows to emerging debt as real interest rates remain extremely low or negative. Many are reluctant to exit positions altogether, however, as they believe central banks will have no choice but to let currencies firm as part of their policy tightening measures.
Pierre-Yves Bareau, who oversees $11 billion in emerging debt at J. P Morgan Asset Management, expects FX appreciation to provide up to half the 10 percent portfolio returns he is targeting for 2011. "Interest rates in most emerging markets are too low and most currencies are undervalued," he said. "But we expect currencies to start appreciating and that should make up for losses on the rates side."
J. P Morgan's GBI-EM index of local bonds has rallied modestly in recent days - a rise the bank attributed to currency gains. Markets are pricing another 100 basis points or more of rate tightening this year in Brazil, Chile, Israel, Poland, Turkey and South Korea, Morgan Stanley data shows.
Comments
Comments are closed for this article.