© Reuters. FILE PHOTO: U.S. dollar notes are seen in this picture illustration
By Dion Rabouin
NEW YORK (Reuters) — One of the best strategies to take advantage of the dollar’s slide since Donald Trump electoral victory is rather exotic: buying local emerging market currency bonds.
Investors who doubted the Trump could quickly deliver promised tax cuts, big spending and better trade agreements and, in doing so, boost the dollar — is now reaping handsome returns from their emerging markets investments while the dollar is ahead nearly 2-1/2-year low.
Investors who are also considered to be too much fear that countries like Mexico would have to suffer the Trump of protectionism, and have been buying during the post-election in emerging markets sell-off.
«It was what he had to say to get elected, given its space and the people he was talking to,» said Federico Garcia Zamora, who manages the Dreyfus Emerging markets Debt Local Currency Fund. «But it made no economic sense,» he says of Trump is committed to repeal the North American Free Trade agreement, to build a border wall with Mexico and impose import duties on Mexican or Chinese products.
Between the Nov. 8 of the presidential election and its low point on Dec. 2, the JP Morgan Emerging Market Global Bond Index fell 6 percent, Reuters data shows. Mexican bonds, which have suffered the most, and the peso hit a record low.
«Our view was that (Asset) economic threats were not credible,» said Garcia. Acting accordingly, he has increased his holdings of peso-denominated Mexican bonds and the funds it manages has exceeded 90% of its peers so far this year, according to Morningstar Direct.
Investors in general favour of emerging countries government debt in dollars, because it eliminates the risk that their returns might get wiped out by the fluctuations of the local currency. Therefore, nearly 332 billion dollars have been invested in these mid-2017, compared to $ 137 billion in local currency bonds, according to research firm eVestment.
But those who stuck with the latter ended with higher yields.
So far this year, emerging market local currency bonds on Bloomberg, Barclays (LON:BARC) index provided a total return of 13.48% compared to 7.77% for foreign currency obligations. The US aggregate bond index returned 3.40%.
THE WEAKNESS OF THE DOLLAR IN PARIS
All 20 of Morningstar’s top 20 best performing emerging market funds this year have been local currency exclusive or overweight in local currency. Some of the best returns for multi-sector funds were boosted by local currency bonds.
Reuters has interviewed half of the 20 most powerful fund managers and they are sticking with those of paris, convinced that the dollar will remain weak. The dollar index (DXY) is expected at the end of the year, down more than 7%, its worst year since the financial crisis, according to a recent Reuters poll showed economists. [nL4N1LN33L]
The dollar’s slide reflects both the investors ‘ disappointment at the lack of progress on US economic policy and the central banks of other measures to end their ultra-loose monetary policy, which is of currencies such as the euro has become more attractive.
David Aniloff, portfolio manager of global fixed income strategies at asset manager SEI said doubts about the Asset of the order of the day prompted him gradually to increase emerging markets allocations.
Aniloff has said that he had shared his emerging market bond exposure is split 50/50 between hard and local currency bonds, but has been divided by most recently 65-35 in local currency bonds favor.
“We are overweight to EM local currency bonds and foreign currency, as we have been in several years,» Aniloff says. SEI is one of the most successful of the emerging market debt funds this year, with data showing a fund beat 98 percent of its peers, and the other, besting 97 percent.
Fund managers also say in many emerging economies have strengthened their capital markets, making them more resilient during recessions cyclical and therefore less risky than in the past.
«This is an excellent opportunity to buy into the emerging markets,» said Ricardo Adrogue, head of emerging markets debt at Barings.
Adrogue of the Emerging Markets Local Currency debt Fund is around 20 percent so far this year, beating 99 percent of its peers.
Kathleen Gaffney, co-manager of the Eaton Vance Multi-sector Income Fund, said the fund last held nearly a quarter of its assets in foreign securities. Non-U.S. currency investments — including those of Mexican, Brazilian, Indian and Indonesian local currency bonds — accounted for half of the outperformance of the fund. The fund beat 97 percent of funds in its peer group year-to-date, according to data from Morningstar.
“These are the currencies that offer the most potential return,» Gaffney said.