Gold­man Likes EM Debt, Mi­nus Trump Touch

Wall Street firm wants to avoid coun­tries likely to be in the fir­ing line of US President

The Economic Times - - Money -

Gold­man Sachs Group Inc. is bullish on emerg­ing-mar­ket govern­ment bonds, with a key caveat — avoid coun­tries likely to be in the fir­ing line of President Don­ald Trump. The yield pre­mium de­manded by in­vestors on de­vel­op­ing-na­tion notes over US Trea­suries is likely to nar­row amid an im­prove­ment in global growth prospects and risk sen­ti­ment, Gold­man an­a­lysts An­drew Ma­theny and Sara Grut said in a note Mon­day.

But the Wall Street firm, which counts sev­eral alumni among Trump’s ad­min­is­tra­tion , fa­vors in­vest­ment-grade bonds from cen­tral and east­ern Europe, the Mid­dle East and Africa.

The re­gion “is rel­a­tively more in­su­lated from for­eign pol­icy risks re­lated to the new US ad­min­is­tra­tion,” the an­a­lysts wrote. Bonds from that re­gion have also seen less spread tight­en­ing than those in Asia and Latin Amer­ica, they said. Trump’s vow to re-make trade pol­icy to the ad­van­tage of the US has seen a bulls eye slapped on some emerg­ing mar­kets. The president’s pledge to re-ne­go­ti­ate the North Amer­i­can Free Trade A g r e e me n t h a s k n o c k e d Mex­i­can as­sets, with an­a­lysts ad­vis­ing traders to steer clear of the peso un­til the ad­min­is­tra­tion’s in­ten­tions are clearer. In Asia, a hand­ful of coun­tries run trade sur­pluses with the US, and in­vestors are wait­ing for more com­men­tary on China, which he ac­cuses of keep­ing the yuan weak to ben­e­fit ex­por ters. Trump also la­beled the US free­trade agree­ment with South Korea a job killer.

NAR­ROW­ING SPREADS

The spread of­fered on for­eign­cur­rency debt from de­vel­op­ing na­tions has dropped by 17 ba­sis points since the Nov. 8 elec­tion to 337 ba­sis points on Fe­bru­ary 10, the small­est dif­fer­ence since Novem­ber 2014, ac­cord­ing to J P Morg a n C h a s e & C o. ’s Emerg­ing Global Bond In­dex. In­vest­ment-grade debt from de­vel­op­ing na­tions handed in­vestors a re­turn of 2.5% this year, while high-yield se­cu­ri­ties gained 3.1%.

Gold­man is shift­ing its pref­er­ence to in­vest­ment-grade debt from high yield­ers be­cause economies with lower lever­age and more lo­cal-currency de­nom­i­nated li­a­bil­i­ties are likely to be less

Un­der Threat

im­pacted by strength in the dol­lar, Moscow-based Ma­theny and Lon­don-based Grut said. While dol­lar bonds pro­tect in­vestors from for­eign-ex­change risk, re­pay­ment amounts are boosted when lo­cal cur­ren­cies re­treat ver­sus the green­back. “An en­vi­ron­ment where global yield curves are steep­en­ing is not nec­es­sar­ily neg­a­tive for emerg­ing-mar­ket credit if paired with an ac­cel­er­at­ing g rowth en­vi­ron­ment.” t he Gold­man an­a­lysts said. “Macro risk in emerg­ing mar­kets is now sta­bi­liz­ing and is pro­jected to de­cline, driven by im­prov­ing growth and cycli­cal dy­nam­ics.”

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