Morgan Stanley says go local in emerging debt after rupiah win

by **Cals** Wed 02 Mar 2016, 23:57

Morgan Stanley says go local in emerging debt after rupiah win

By Bloomberg / Bloomberg | March 2, 2016 : 1:49 PM MYT

SINGAPORE (March 2): Six months after picking winners in Indonesia’s rupiah and Malaysia’s ringgit, Morgan Stanley’s asset management arm is becoming bullish on the local-currency debt of developing nations.

Morgan Stanley Investment Management expects domestic sovereign bonds to outperform their dollar-denominated counterparts as a likely bottoming out of oil prices in the second quarter boosts demand for higher-yielding assets, said Jens Nystedt, the New York-based portfolio manager of emerging- market debt at the firm that oversees US$406 billion. Indonesian and Indian notes offer the highest interest rates among Asia’s major economies and are attractive because their central banks have room to cut borrowing costs, he said.

“When it comes to emerging-market currencies, we see them as being significantly cheap to fair value in many cases and you’re getting a high yield at the same time," Nystedt, who is touring Asia, said in an interview. “We’re not necessarily negative on external sovereign debt.”

While China’s slowdown remains a “headwind,” India and Indonesia are relatively less reliant on exports to their Asian neighbor and will also benefit from government efforts to mitigate economic challenges, according to the money manager. The rupiah and ringgit have rebounded from 17-year lows to become the best performers among 24 emerging currencies since September, when Nystedt named them his top picks.

Benchmark 10-year local-currency bonds yield 8.14% in Indonesia and 7.62% in India. That compares with the average yield of 6.23% on emerging-market dollar debt, according an index compiled by JPMorgan Chase & Co.

Domestic notes of developing economies have returned 2.6% this year in local-currency terms, outpacing the 2.1% gain on their dollar debt, JPMorgan indexes show. The extra yield investors demand to hold emerging-market sovereign debt over 10-year U.S. Treasuries is 4.99 percentage points, compared with an average spread of 4.19 percentage points over five years, according to the gauges.

“We’re nearing that inflection point where we’re looking toward the right time to be overweight” on the emerging-market local-currency debt portfolio, Nystedt said. “We’re still cautious. We’re still looking toward opportunities in those stronger fundamental stories that are commodity importers.”

‘Stronger Calls’

Cheaper oil benefits energy importers such as India and Indonesia, and investors will be more comfortable buying the debt of Malaysia, a net oil exporter, once crude prices bottom out toward the end of the next quarter, according to Nystedt. Indonesian notes continue to be “one of our stronger calls going forward,” while Malaysia is close to “fair value,” he said. Morgan Stanley also favors Indian bonds.

Brent crude sank to a 12-year low of US$27.10 a barrel on Jan 20, after slumping 35% in 2015 and 48% in 2014. It has rallied 36% since, paring this year’s loss to 1.5%.

Morgan Stanley’s outlook on the rupiah is more positive than for India’s rupee as Indonesian authorities, while rebuilding their foreign-exchange reserves, have allowed “a more sizable appreciation” as foreign funds return, Nystedt said. The rupiah advanced 3.8% this year, the most in Asia, while the rupee weakened toward a record low amid a selloff in local stocks and bonds.

Indonesia Inflows

Global funds have increased their holdings of Indonesian debt by US$2.1 billion this year, adding to last year’s purchases of US$7.5 billion, and have put US$155 million into the nation’s equities, after withdrawing US$1.6 billion in 2015, data compiled by Bloomberg show.

The rupiah has surged 10.3% since Sept 30 and the ringgit has strengthened 5.6% in the period, while the rupee weakened 3%, according to data compiled by Bloomberg. Nystedt had said in an interview with Bloomberg Newsearlier that month that the rupiah and ringgit were the most attractive emerging-market currencies, following a selloff, while the rupee was less so.

“We’re still believers in India on the bond side, not as much on the currency side,” he said. “We’re more neutral there.”