Goldman Likes EM Debt, Minus Trump Touch
Wall Street firm wants to avoid countries likely to be in the firing line of US President
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.
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
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.”