GMO Banks on Riskiest Emerging Currencies, Argentina Debt

(Bloomberg) -- Emerging-market currencies haven’t looked this cheap in years, and some of the most downtrodden assets offer the best value, according to Grantham Mayo Van Otterloo & Co.

Ritirupa Samanta, head of systematic fixed income in Boston, favors Indonesia’s rupiah, Turkey’s lira and the Mexican peso, which have all been pummeled by the virus pandemic this year. The company holds sovereign bonds sold by Argentina, an issuer that’s in danger of defaulting on its debt again.

“We see now a much bigger complex of undervalued currencies,” Samanta said in an interview. “With Turkey and Mexico and Brazil having major selloffs on the local currency side, there’s been a real attractive opportunity to be in local currency.”

A $2.8 trillion rout in developing-nation assets has spurred debate over whether it’s time for investors to dive back in or hold off for better bargains. M&G Ltd. and State Street Global Advisors advocate caution, arguing that renewed trade tensions and lower global demand for commodities pose an added risk.

A JPMorgan Chase & Co. gauge of emerging-market exchange rates tumbled to a record low last month as the pandemic spurred outflows from riskier assets. Brazil’s real, the Mexican peso and the lira are among the most undervalued currencies, according to Z-scores which measure volatility-adjusted deviations from a 10-year average.

Samanta pointed to a blow-out in bid-ask spreads -- the difference between the highest price a buyer is willing to pay and the lowest a seller is willing to accept -- as an indication that emerging-market assets have been oversold.

“From a very simple standpoint we saw bid-ask spreads in emerging markets go up to 180, 170 basis points,” said Samanta, who earned a PhD in international economics from Brandeis University. They’re usually around 70 or 80 basis points, she said.

Carry Trade

The asset manager also likes the Indian rupee, Israeli shekel and Colombian peso. Emerging-market carry trades will gain momentum as borrowing costs from the U.S. to Australia drop to near zero, Samanta said.

The rupiah and lira in particular offer “material carry” -- trades in which investors borrow in a lower-yielding currency such as the euro or dollar to invest in developing-nation assets.

Perpetuating their appeal is a “real search for yield” in a world saturated with nearly $12 trillion of sub-zero yielding debt, said Samanta. “That takes you to high interest-rate countries and in this particular world, you should see more of that coming from emerging markets rather than developed markets.”

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