(Nov 24): The world’s biggest money manager is loading up on emerging-market debt again.
BlackRock Inc’s head of emerging-market debt Amer Bisat has dropped his 2022 defensive view on the asset class because he sees a peak in US interest-rate hikes nearing and thinks distress in some countries won’t trigger a systemic crisis. He favours bonds from the likes of Mexico, Indonesia and potentially Poland.
“A window for bullishness has opened up,” said Bisat in an interview in London. “It is not the time to be extremely defensive any more and it is not too early to deploy capital.”
The change of call comes as risky assets have started to rally, and chimes with views from others on Wall Street such as Morgan Stanley. Both hard and local currency emerging-market bonds have climbed this month, paring double-digit losses this year.
BlackRock was wary of emerging-market debt earlier this year due to countries’ large funding needs, especially after Russia’s war in Ukraine shuttered capital markets for so-called risky credits. Investors were also avoiding EM debt due to aggressive rate hikes by the world’s most important central banks.
“We are almost done with central bank hiking but we are not done — we still have four to five months of hiking in front of us,” Bisat said.
Now that debate is swirling on a slower pace of US rate hikes, dollar-denominated EM sovereign and corporate debt has rallied to send yields down 90 basis points in the past month, according to a Bloomberg index. Yields were at the highest since 2009 on Oct 24.
While the dollar bonds of almost 20 emerging markets from Argentina to Ethiopia and Tajikistan are still trading at distressed levels, BlackRock is ruling out the risk that these will cause global systemic trouble similar to the Asian crisis in the 1990s.
Bonds offer yields that do not require investors to be overly aggressive, New York-based Bisat said.
“Now yields are attractive in a way that they weren’t in the past and there are investors who are interested in the asset class because it is income generating,” said Bisat, who manages about US$30 billion with more than 30 investment professionals at BlackRock. “You can stay in strong names and still pick up 6% to 7% yield.”
Among major emerging markets, he likes Mexico due to good growth prospects, its links to the US and decent yields. Once the inflation problem in central Europe peaks, Poland may provide an interesting opportunity, he said.
There are still risks from a global downturn, Bisat cautioned. A record five Fitch-rated sovereigns were in default during the course of the year: Sri Lanka, Belarus, Ukraine, Zambia and Lebanon. Of these Zambia and Lebanon were already in default before the start of 2022.
Emerging-market debt funds registered outflows for the past 14 weeks, Bank of America strategists write in a note, citing EPFR Global data.
“It is not smooth sailing because of the impending slowdown and the financial accidents that keep emerging,” Bisat said.
While smaller developing economies may face turbulence as the global economy contracts, meaning there’s less liquidity for risky borrowers, Bisat said most distressed nations are new borrowers and have not accumulated the amount of debt that would damage the global economy in the event of a collapse.
“The larger economies have handled the stress quite well fundamentally. They have done their homework,” said Bisat. “I feel comfortable in investing in them right now without worrying about default.”
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