Wall Street banks are bullish on emerging market debt

  • JPMorgan raises its outlook on international emerging market bonds to “market weight”
  • Morgan Stanley expects a return of more than 14% in 2023
  • Citi becomes “more constructive” on emerging bonds

LONDON, Nov 14 (Reuters) – Wall Street banks are raising their outlook for emerging market hard-currency bonds as a slowdown in U.S. rate hikes could provide respite for the struggling asset class.

Developing-economy government bonds have posted negative returns of 20% (.JPMEGDR) this year amid soaring inflation and aggressive rate hikes in what is expected to be one of the worst years on record for emerging markets.

JPMorgan on Monday raised its outlook for hard-currency emerging market debt from “market weight” to “underweight,” saying the latest U.S. inflation data cemented a shift to the next phase of the market. cycle. The focus is now on growth and the risk of recession in the United States, he said, and away from higher inflation leading to a hike in the Fed Funds final rate as the main bearish driver of emerging markets.

In its outlook for 2023, Morgan Stanley predicted that hard-currency bonds in emerging markets could return more than 14% next year.

“We enter the final weeks of 2022 anticipating better months ahead for emerging market fixed income investors,” Morgan Stanley’s James Lord wrote in a note to clients.

“The main call behind the positive total returns is the expectation of lower inflation globally in 2023.”

JPMorgan recently estimated that fund managers sold $86 billion worth of emerging market bonds, quadruple the amount they sold in 2015.

Global financial markets on Friday cheered data showing a weaker-than-expected rise in U.S. consumer prices in October as underlying inflation appeared to have peaked.

This potentially allows the Fed to reverse its steep interest rate hikes and Citi has become more constructive on both emerging market fixed income and developing currencies.

“The Fed pivot narrative is making a comeback, as the U.S. core CPI peak finally appears to have been reached,” said Dirk Willer, head of emerging markets strategy at Citi Research, in the weekly strategy brief. form the bank. “Recession fears could potentially cloud the best move, but for now, markets are trading a more dovish rate outlook.”

However, it may not be quite time for investors to dive into emerging market sovereign credit.

JPMorgan emerging markets strategist Jonny Goulden said Federal Reserve hike cycles are usually followed by a “waiting” period before a US recession begins, or maybe even a downturn. an emerging market financial crisis.

“This will be the Fed’s biggest hike cycle in decades, with a significant tightening of general financial conditions,” he said.

“But we pointed out that the ‘waiting’ period when the Fed has made its latest hikes is usually accompanied by some relief (in emerging markets).”

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Reporting by Karin Strohecker; additional reporting by Marc Jones, editing by Kirsten Donovan

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