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Lazard Stays Overweight Emerging-Market Bonds Despite Virus

Lazard Looks Past Virus to Stay Overweight Emerging-Market Bonds

(Bloomberg) -- Lazard Asset Management is looking beyond the spread of the deadly coronavirus and standing firm with its overweight position in emerging-market local-currency bonds.

While the asset manager has become cautious in the short term due to the uncertainty surrounding the outbreak, it believes any setback to global growth is likely to be limited to the next three months or so, according to Arif Joshi, a managing director and portfolio manager in the emerging-markets debt team in New York.

“We have a structurally bullish view on local-currency debt,” said Joshi at Lazard Asset, which oversees $223 billion globally. “That being said you can’t ignore the fact that certain countries are going to get hurt in the near term by this.”

Lazard Stays Overweight Emerging-Market Bonds Despite Virus

Lazard went overweight on local-currency developing-nation debt relative to dollar-denominated ones last quarter for the first time in about 18 months, Joshi said. The company was attracted by the prospect that growth rates in developing nations would pick up, boosting their currencies, he said.

While maintaining its bullish stance, the spread of the virus has convinced Lazard to start hedging some long positions in EM currencies through either buying puts on Asia-focused foreign exchange or reducing exposure and putting it into rates as that would benefit if central banks cut interest rates, he said.

“There are a lot of uncertainties around the effect of the China virus, how long that is going to affect demand and supply,” Joshi said. “So you need to be cautious in this time time period fully understanding that you are cautious in an asset class that does have deep value.”

Supercharged Rally

The money manager can even foresee a scenario in which the virus ends up being positive for some emerging-market assets.

Unexpected monetary stimulus from central banks in response to the virus has the potential to “supercharge” a local-currency rally later in the year if the effects of the outbreak prove to be temporary, Joshi said.

Bank of Thailand cut its benchmark rate to a record-low 1% last week, while Singapore policy makers indicated there was room to further weaken its currency, and the Philippines also expressed a willingness to ease.

Local-currency bonds have underperformed dollar-denominated debt this year largely because of the greenback’s strength, Joshi said. EM debt did well last year because yields fell, not because currencies rose, he said. That means the local currency rally has yet to begin, while growth rates in emerging markets are significantly below potential. The JPMorgan Emerging Market Currency Index has declined 6.2% over the past 12 months.

In terms of individual countries, Lazard is most bullish on Mexican local-currency bonds as the country is at the start of a rate-cutting cycle and is expected to ease throughout this year, Joshi said. It also remains bullish on Indonesian local rates, a position it’s held for about two years, he said.

To contact the reporter on this story: Andreea Papuc in Sydney at apapuc1@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Nicholas Reynolds, Joanna Ossinger

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