Rand is in investors’ emerging-market bargain bin
Investors are searching for cheap currencies, stocks and bonds after an emerging-market rout sparked by concern about a strengthening dollar and rising US yields
Lagos — The rand seems to be in plenty of investors’ bargain bins these days. So are the Colombian peso, Indian bonds and Chinese stocks as a slew of banks from Goldman Sachs to Morgan Stanley and Société Générale advocate a return to emerging markets.
Investors are searching for cheap currencies, stocks and bonds following an emerging-market rout sparked by concern over a strengthening dollar and rising US yields. But the days when money managers could rely on high growth and low inflation to fuel broad returns across most emerging-market assets were long gone, said SocGen.
"The world has moved on very quickly from a ‘Goldilocks scenario’ in which investors were able to pick up yield in a variety of asset classes, to an environment in which significantly more discernment is necessary," SocGen strategists including Alain Bokobza said in a note on Wednesday.
Here is where some analysts and investors are looking for value:
The currency has weakened 9.5% against the dollar since late February. Morgan Stanley and SocGen say it is probably oversold, a victim of its status as one of the most liquid currencies among peers and a bellwether for emerging markets.
Morgan Stanley, which forecasts the rand appreciating 11% by the end of the year to R11.40 against the greenback, expects a structural economic recovery due to Cyril Ramaphosa becoming president in February. The Wall Street lender doubts Tuesday’s weaker than expected growth figures — which sent the rand tumbling as much as 2.1% — will derail that progress. Goldman says the rand is one of the "clearest idiosyncratic opportunities".
JPMorgan Chase & Co is also bullish, holding an overweight position on rand-denominated bonds thanks to the rand’s expected stability and attractive real yields. It is either neutral or underweight for all other local bonds among European and African emerging markets.
Latin America’s fourth-biggest economy should be a beneficiary of crude oil prices that have climbed almost 60% in the past year. JPMorgan has it as the biggest overweight holding in its basket of emerging currencies. Nomura Holdings is also optimistic. Craig Chan, head of emerging-markets strategy at the Tokyo-based bank, recommends shorting the Brazilian real against the peso.
Indian and Indonesian bonds
Goldman says that the recent sell-off of rupee debt has gone too far and advises clients to buy five-year Indian government bonds. Yields on securities maturing in May 2023 have risen about 150 basis points since September to above 8%, the highest in more than two years. India’s central bank raised its benchmark interest rate for the first time since 2014 on Wednesday, setting the stage for a gradual tightening cycle as economic growth rebounds from a four-year low and price pressures build.
JPMorgan likes Indonesia’s local bonds. In a June 1 note, analysts including Anezka Christovova applauded the government’s "commitment to keeping a firm leash on its twin balances — fiscal and current-account deficits — which already stack up well in the EM [emerging-market] world."
SocGen and Goldman think investors should load up on Chinese stocks. The former says they will benefit from China’s growth rate, which at 6.5% is still one of the highest in the world. The country’s inclusion in June in MSCI’s indices and a "low correlation with developed equities" also count in favour of Chinese stocks.
The forward price-to-earnings ratio of stocks on China’s main bourse in Shanghai has dropped to 11.5 from 13.5 in January. They are now cheaper than emerging markets as a whole and substantially less costly than the MSCI World Index.
Turkish dollar bonds
Fidelity International sees value in Turkish external sovereign debt following the third rate increase by the country’s central bank in less than two months to stabilise the lira. The bonds are mispriced relative to other BB-rated countries, while debt-to-GDP is moderate compared with may of its peers, says Paul Greer, a London-based portfolio manager. The country is willing and able to repay its debt, he says.