NEW YORK, April 26 (IFR) - BlackRock remains bullish on emerging market credit even after a rally by the asset class in recent months, top officials at the global asset manager said on Tuesday.
“We are taking a little bit of risk off the table, but we are still on the long side,” said Pablo Goldberg, senior strategist for BlackRock’s EM debt team.
“We will be more buyers on dips than anything else.”
EM debt has turned around sharply since February, when portfolio managers were struggling to satisfy client needs after spreads had gapped out and FX values tumbled.
Spreads on JP Morgan’s EMBI Global Diversified Index, which tracks the performance of EM sovereign debt, have tightened about 125bp since a recent peak of 507bp on February 11.
And BlackRock, which called an end to the three-year EM bear market earlier this year, thinks there is more upside left.
“Is the rally over?” said Goldberg. “We say no.”
Not only has a recovery in oil prices helped the crude exporters that dominate much of emerging markets, but a stabler dollar has left room for rate cuts.
“A stable dollar [around the Fed’s dovish stance] has been a game-changer for emerging markets,” said Gerardo Rodriguez, a portfolio manager for BlackRock’s EM Group.
Many EM countries had been unable to loosen monetary policy when their currencies were falling in value and stoking inflation.
But with many local currencies on the mend, central banks now have room to stimulate growth.
“We might see a vicious cycle turn into a virtuous cycle,” said Goldberg. “Economic activity data in emerging markets is coming surprisingly above forecasts.”
Better economic data are helping to open a gap with developed economies, where growth has been decelerating, he said.
Meanwhile accommodative monetary policies in Europe and a more dovish stance by the Fed have reignited crossover flows into emerging markets as investors go on the hunt for yield.
“[There is] an absence of income in the world space, and emerging markets are one of the few places that offers income,” he said.
Goldberg has been favoring oil-exporting sovereigns such as Ecuador as well as state-owned oil companies like Mexico’s Pemex.
He remains neutral on Brazilian hard currency debt but is long on rates on the hope that a change in government may result in fiscal tightening but looser monetary policies.
In Argentina, BlackRock stuck to the shorter-dated five-year tranche of the sovereign’s US$16.5bn issue last week, reasoning the country is a play on further upgrades.
But challenges remain for the country and the broader EM sector.
Signs of higher inflation in the US could quickly turn sentiment about emerging markets if the Federal Reserve feels the need to quicken the pace of rate hikes.
China risks also loom large, though concerns about growth have faded thanks to government efforts to bolster the economy.
“History has told us that these credit expansions are unsustainable,” said Rodriguez, referring to China.
“But the probability of a tail event has been reduced ... and may be years away before that unravels.” (Reporting by Paul Kilby; Editing by Marc Carnegie)