Singapore: International investors are buying Brazilian, Indian and Indonesian bonds, driving the biggest monthly gain in emerging-market debt in at least three years, as central banks cut interest rates to support their economies.
Merrill Lynch and Co.’s LDM Plus Index of local-currency sovereign notes in 18 developing nations rallied 8.2% in dollar terms in December, the most since the index started in 2006. Indonesia’s domestic securities gained 29%, India’s climbed 12.6% and Brazil’s advanced 6.6%, according to Merrill.
Investec Asset Management Ltd, Aberdeen Asset Management Plc. and Erste Sparinvest KAG, which together manage more than $6 billion in emerging-market debt, are turning bullish as inflation cools and currencies rally. The index had dropped 6.5% in the first 11 months as the worst global financial crisis since the Great Depression caused Pakistan, Ukraine and Hungary to seek loans from the International Monetary Fund (IMF).
Rate cuts: The Reserve Bank of India building in New Delhi. Harikrishna Katragadda / Mint
Investors expect rate cuts across many countries with no inflation problems going forward over the next couple of years, said Anton Hauser, who manages $1.2 billion in emerging-market debt in Vienna at Sparinvest, part of Austria’s biggest bank by market value. This means quite good returns on local-currency bonds in general.
Policymakers are shifting focus from fighting inflation as recessions in the US, Europe and Japan erode export demand, shrinking wages and reducing raw material costs. The World Bank predicted on 9 December growth in developing economies will slow to 4.5% in 2009, from 6.3% last year, as global expansion cools to 0.9%.
On Friday, the Reserve Bank of India (RBI) cut its benchmark overnight lending rate, or repurchase rate, to 5.5% from 6.5%. It also cut the reverse-repurchase rate, or the rate at which it drains money from the banking system, by a percentage point to 4%. India’s growth may slow to 7% in the year ending 31 March, from 9% or more in the previous three years, the government said on 23 December.
Bank Indonesia lowered its benchmark for the first time in a year on 4 December to 9.25%. Brazil, India, Thailand and Mexico will cut borrowing costs this month, according to Bloomberg surveys of economists.
Developing-nation debt plunged for much of 2008 as credit losses mounted, prompting investors to hoard cash and pare investments in everything but the safest government securities. Outflows from emerging-market bond funds averaged $800 million in the 19 weeks ended 17 December, according to EPFR Global, a Cambridge, Massachusetts-based research company.
The LDM Plus Index rose 1.1% in dollar terms in 2008, compared with a 12.9% gain before adjusting for foreign- exchange swings. Returns for US currency investors were 13.9% in 2007 and 12.7% in 2006. US treasuries returned 14% in 2008, a separate Merrill index shows. “I would basically avoid all emerging markets for the first six months of 2009 with the possible exception of China and India,” said Arjuna Mahendran, Asia chief investment strategist in Singapore for HSBC Private Bank, which manages $494 billion in assets. “In a recession, it’s very difficult to raise taxes.”
“Pakistan is an extreme case of the risk as raising tax income is a condition of its $7.6 billion IMF loan,” he said.
The Korean won weakened 26% last year, the Brazilian real 23%, the rupee 19% and the Indonesian rupiah 15% on concern governments and companies would struggle to meet overseas obligations. South Korea’s government last month said it is considering providing aid to car makers and Russia approved a list of 295 companies to receive state support.
Developing nations may increase sales of dollar-denominated debt 68% to $65 billion this year to plug budget deficits, according to ING Groep NV. Reliance on foreign markets led countries across Latin America to default in the 1980s, according to Ricardo Hausmann, director of the Center for International Development at Harvard University in Cambridge, Massachusetts.
The risk of default is easing as access to foreign currency improves. The London interbank offered rate, which banks charge each other for three-month dollar funds, declined to 1.425% from as high as 4.82% on 10 October. Outflows from emerging-market bond funds also slowed to $69 million in the week ended 17 December, the least in 18 weeks, EPFR said. Investors intensified their search for yield in mid-December, EPFR said.
The yield on the 9% Indonesian government note due September 2018 fell 3.69 percentage points last month to 11.86%. Sparinvest will most likely buy Indonesian bonds, Hauser said. A Bloomberg survey shows the yield may drop to 10.8% this year, providing investors with local-currency returns of 18%.
The yield on the benchmark Brazilian five-year bond slid 3.82 percentage points last month to 13%. Economists lowered their forecast for the Central Bank of Brazil’s 13.75% benchmark overnight rate to 12.25% by the end of the year, from 13% the previous week, according to the median forecast in a central bank survey of about 100 institutions published on 22 December.
The Brazilian real will gain 2% against the dollar in the next 12 months, enhancing returns for investors, according to the median estimate of 19 analysts in a Bloomberg News survey. The rupee will advance 1.6% to 48, while the Indonesian rupiah will rise to 11,000 from 11,100, separate surveys showed.
“The higher yielders, such as Brazil, Turkey, Hungary, Colombia, Indonesia are our picks,” said Peter Eerdmans, head of emerging-market bonds at Investec Asset Management in London, which manages a total of $700 million in global emerging-market debt. “We are still very bullish.” Central banks are going to have to turn their policies to be much more accommodative, said Kenneth Akintewe, portfolio manager in Singapore with Aberdeen. Scotland’s largest independent fund manager, which manages $160 billion in assets, is bullish on Indian, Thai and South Korean debt. Thailand, which reduced its benchmark rate by the most ever to 2.75% on 3 December, may reduce it to 1.5% this year, Akintewe said.
“Rate cuts are happening at a much faster pace,” said Rachana Mehta, head of fixed-income in Singapore at KE Capital, a venture between Kim Eng Holdings Ltd and Mitsubishi UFJ Securities Co. Ltd set up in June 2008. “I haven’t seen opportunities like these since the Asian crisis a decade ago.”
She favours bonds in India, South Korea and the Philippines.
Kyoungwha Kim in Beijing and Lester Pimentel in New York contributed to this story.