World's Largest Funds Bet on Nascent Emerging-Market Rally

(Bloomberg) -- The explosive rally spreading across emerging-market bond markets is just getting started, according to two of the world’s largest money managers.

BlackRock Inc. says valuations remain attractive despite the strongest start to a year for the asset class in almost two decades. JPMorgan Asset Management is looking to add to its portfolio of developing-market credit, betting that a softer dollar will continue to spur gains.

The calls are testament to the turnaround in investor sentiment. Riskier assets took a beating in 2018 on concern the global economy was slowing, but the prospect of a slower pace of Federal Reserve tightening and growing optimism over a U.S.-China trade deal has investors flocking back.

“Our strategy in the following months is to add on dips,” said Pierre-Yves Bareau, JPMorgan’s London-based head of emerging-market debt. “Valuations have adjusted to negative fundamental developments and the global growth re-synchronization backdrop should therefore allow for better performance this year.”

After its first annual loss since 2013, Bank of America Merrill Lynch’s emerging-market sovereign and corporate debt index is off to its best start to a year since 2001, clocking a 2.3 percent gain in January. Local bonds from emerging markets rose 1.6 percent in January, according to Bloomberg Barclays indices. Global emerging market debt funds saw a record $6 billion of inflows in the month, according to Citigroup.

“A pause in U.S. monetary policy tightening and U.S. dollar strength removes a key drag on performance,” Richard Turnill, BlackRock’s London-based global chief investment strategist, wrote in an emailed note to clients. Limited issuance in recent months is also supportive, he said.

Still, one of the biggest risks to the rally is a potential slowdown in China, as counter-cyclical measures by the authorities will be limited and are unlikely to prevent a deceleration in growth, JPMorgan’s Bareau said. He sees the world’s second-largest economy growing at a 6 percent rate in 2019, the slowest pace since 1990.

To contact the reporter on this story: Selcuk Gokoluk in London at sgokoluk@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Constantine Courcoulas, Robert Brand

©2019 Bloomberg L.P.