A guest walks past an exhibit at the Museum of Finance in the HKEX Connect Hall on the first day of trading after Lunar New Year at the Hong Kong Exchanges & Clearing Ltd. (HKEX) in Hong Kong. (Photographer: Anthony Kwan/Bloomberg)

PineBridge Sees Asia Bargain as Treasury Selloff on Last Leg

(Bloomberg) -- Emerging market investors - don’t fear the strong dollar, embrace it.

That’s the message from the likes of Nikko Asset Management Ltd. and PineBridge Investments who argue the resurgent greenback and lofty Treasury yields present an opportunity to buy -- not sell -- emerging Asian assets.

The reason? The recent strength in the dollar has made it cheaper to gain exposure to a rapidly growing region. Plus, the money managers say the greenback’s ascent and the selloff in Treasuries are unlikely to last.

“We are adding risk to our emerging-market portfolios in the current market environment,” said Anders Faergemann, a London-based senior fund manager at PineBridge which oversees $90.5 billion globally. “The rise in U.S. Treasury yields this year may be on its last legs as U.S. inflation may be about to peak for the year.”

Thailand, Malaysia

Pinebridge and Nikko are scouring Asia for buys, with Thailand’s baht and Malaysian bonds among their picks, as they look past the volatility to focus on the region’s positive growth and subdued inflation. Indonesian bonds are also on the radar.

The portfolio managers are affirming their faith in Asia even as some investors sour, with 10-year U.S. Treasury yields hovering near the key 3 percent mark and the Bloomberg Dollar Spot Index at a four-month high. A Bloomberg gauge tracking total returns on local-currency emerging Asian government bonds has lost over a percent so far in 2018, after recording its biggest annual gain since 2010 last year.

PineBridge Sees Asia Bargain as Treasury Selloff on Last Leg

Appetite for riskier assets has wilted on the back of fears that the rout in Treasuries may not be over and that the Federal Reserve may step up the pace of tightening if inflation accelerates. Asian bonds, which lured over $100 billion the whole of last year, have seen inflows slow as money managers, including those at Goldman Sachs Asset Management, bet that Treasury yields have yet to reach their peak.

India, Indonesia

Even high-yielders India and Indonesia, long favored by funds hungry for returns, haven’t been spared. Overseas investors pulled $1.78 billion from rupee notes in the week ended April 20, the biggest five-day outflow in more than a year. They sold $1.55 billion of rupiah securities in the week through April 27, the most for the period since 2011, prompting Bank Indonesia to pledge to restore calm to its financial markets.

“We view this as an opportunity to add to Asia government bond holdings after the recent correction but we are cognizant that the stabilization of U.S. rates will be the pre-requisite to do so,” said Edward Ng, a fixed-income portfolio manager in Singapore at Nikko which oversaw $211.5 billion as at end-2017.

The recent cheapening of Malaysian bonds could be a draw for investors for whom the ringgit remains a favorite currency in Asia, according to Ng. The sell-off in Indonesian debt bonds is also providing investors with better entry levels, he said.

Still, not every fund manager is in a rush to get out the checkbook. Schroder Investment Management Ltd. said while it may add to its holdings of selected Asian debt, it is waiting for market swings to abate.

“Currently we are fairly neutral and may look to add based on a country-by-country basis with regards to which cheapens up the most relative to their fundamental and market technical expectations,” said Manu George, fixed-income director at Schroder Investment which managed $604.7 billion globally as at end-2017. “We are waiting for better opportunities as we anticipate some short-term volatility in the near term.”

©2018 Bloomberg L.P.