Fixed Income  

Pictet eyes ‘increasingly attractive’ EM currency bonds

Pictet Asset Management has backed emerging market local currency bonds as the top fixed income asset to own in the face of a bleak outlook for other sectors.

Luca Paolini, chief strategist at Pictet Asset Management, said local currency debt, which are bonds issued by emerging market governments in their own currency, were “becoming increasingly attractive”.

The bonds have been hit hard in recent years due to a general weakening in emerging market currencies, many of which have lost a substantial amount of value relative to developed world currencies.

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However, Mr Paolini said these falls had pushed many currencies well below ‘fair value’, which he said meant there was “some scope for a rebound in the medium term”.

Furthermore, Mr Paolini said the likely continuation of low interest rates in the developed world was supportive of higher-yielding assets, such as emerging market debt, as global investors were still being forced to find yield.

Mr Paolini said Pictet had established overweight positions in the local currency debt of Brazil and Turkey, while the firm was prepared to take short-term tactical positions in debt from South Africa, Korea and India.

The chief strategist said there was a “divergence” opening up between different emerging market economies, sparked by recent commodity price moves.

He said: “Manufacturing exporters and energy importers, such as Turkey, Korea and India, are benefiting from the decline in energy costs, while commodity exporters, especially those in Latin America, are struggling.”

While the asset manager has a positive outlook on emerging market debt, it has a neutral or negative view on most other fixed income asset classes.

Mr Paolini said Pictet had recently reduced its exposure to investment-grade debt in Europe because the outlook was “not positive”.

“Valuations look stretched and we have reduced European investment-grade bonds to a single-digit underweight position,” he said.

He added that government bonds in the developed world “remain less attractive” because prices had “moved too far in discounting slow growth and weaker inflation relative to our own expectations”.

Pictet is also cautious on the outlook for the high-yield bond market, because “volatility has risen as liquidity has deteriorated”. Mr Paolini said the firm currently had a “neutral” position in high yield.

In contrast to the largely underwhelming outlook for fixed income, he said there was an “improving” outlook for equities.

Pictet currently favours European equities because it views the rest of the market as “overly pessimistic” on the region.