Amid election surprises, EM investors are bullish on local debt

EM investors pivot towards local bonds: In the wake of election disruptions that have upended the “long-standing” positions of major developing economies’ bond markets, emerging market investors such as Ashmore and Ninety One are shifting towards buying local bonds and relative value currency securities, Bloomberg reports. France’s decision to hold snap elections, for example, sent the EUR to its weakest in a month.

Investors are liking the risk: “We’ve been increasing the frontier risk, through both local bonds and FX derivatives. We like the story in Egypt, we like some of the stories in smaller Latin American names. We’re trying to diversify and not load up,” Christine Reed, a portfolio manager at Ninety One told Bloomberg.

Election “surprises” have triggered the search for alternative return avenues, with the MXN — once favored for carry trades — currently losing investor favor after a bout of volatility following the elections, with concerns that potential economic reforms will increase the government’s influence in the economy. Meanwhile, the Polish PLN is gaining traction for its perceived insulation from political volatility.

Appetite for Turkey’s debt is also on the rise: In Turkey, the post-election economic overhaul, including the central bank’s aggressive rate hikes and investor-friendly policies, have sparked a surge in demand for local-currency assets, with foreign holdings of TRY-denominated bonds jumping tenfold in a year, reflecting investor confidence.

What are EMs’ selling points? “We see cleaner positioning as a positive technical factor, but more importantly for us is a country’s monetary and fiscal policy stance, and inflation and growth profiles. Otherwise, we are running the risk of picking up pennies in front of a steamroller,” says Valentina Chen, co-head of emerging-market debt at Mackay Shields.

MARKETS THIS MORNING-

Asia-Pacific markets are mixed on their return from a public holiday, with Japan’s Nikkei up 0.49%, while the Hang Seng is down 1.4% — seemingly unaffected by the rally over on Wall Street, which saw the Nasdaq and S&P 500 hit fresh highs yesterday.

THE CLOSING BELL-

The EGX30 rose 0.9% at yesterday’s close on turnover of EGP 2.7 bn (42.1% below the 90-day average). Regional investors were net sellers. The index is up 4.0% YTD.

In the green: Mopco (+5.3%), AMOC (+5.3%), and Juhayna (+3.9%).

In the red: Palm Hills Development (-2.5%), Telecom Egypt (-1.3%), and Eastern Company (-1.3%).

CORPORATE ACTIONS-

B Investments will pay out dividends of EGP 1 per share on its 2023 earnings, it said in an EGX disclosure (pdf).