EM bonds offer outbreak immunity

HONG KONG: Emerging-market local-currency bonds should continue to prove more resilient than their equity counterparts amid the coronavirus outbreak thanks to proactive monetary policy and earnings uncertainty, say analysts.

Central banks have been quick to respond to the threat, with Malaysia, Thailand and the Philippines cutting interest rates, and Singapore and Indonesia providing dovish guidance. That has helped boost developing-nation bonds, while equities have remained under pressure as analysts lower profit forecasts.

The Bloomberg Barclays EM Local-Currency Government Bond Index has fallen just 0.2% since markets first took fright about the outbreak on Jan 21, compared with about a 3% drop in the MSCI Emerging Markets Index.

While developing-nation exchange-traded funds have seen outflows, they have been concentrated in stocks, with bond funds seeing much more modest withdrawals.

“Emerging-market bonds will be supported as there is still room for additional rate cuts, while further upside for equities is limited from a valuation perspective,” said Satoru Matsumoto, a Tokyo-based fund manager at Asset Management One Co.

In some emerging markets, investors are flooding into debt as investors look to central banks. Foreign investors were net buyers of South Korean debt for 21 straight days through Feb 10, as bets rose for a rate cut. Still, not every developing country is benefiting — global funds are selling Indonesian sovereign bonds at the fastest pace in almost a decade.

Outside of Asia, Brazil’s central bank has cut rates to an alltime low and warned of the perils of a prolonged virus outbreak.

“The combination of attractive real rates and ongoing monetary easing in emerging markets makes local currency bonds attractive,” said Alexander Wolf, head of investment strategy for Asia at JPMorgan Private Bank in Hong Kong.

While equities have historically enjoyed quick recoveries after previous sell-offs, thanks to buy-the-dip investors, there remains a lot of uncertainty about the impact of the virus on profits.

“With uncertainty over how deep the damage will be from the coronavirus on corporate earnings and economic growth”, investors are unlikely to aggressively buy emerging-market equities, said Tsutomu Soma, a Tokyo-based bond trader at Monex Inc. “It makes more sense to buy bonds rather than equities in developing markets,” he said.