Emerging market local currency sovereign debt is this year expected to deliver double digit returns despite the volatile environment.
That is according to Sergio Trigo Paz, head of emerging markets fixed income at BlackRock. Speaking at the company's roundtable event in London on Tuesday, Trigo Paz said now is the time to capture the upside from the recent pullback in the dollar.
‘Local market debt pays you around a 7% coupon, which has been very difficult to capture over the years because you had foreign exchange dominating it. Dollar appreciation and local currency weakness made things worse for many emerging markets as any income could be shaven in a one month move,' said Trigo Paz.
However, he said, this year income can be captured because there is monetary policy normalisation in developed markets and some emerging markets countries are cutting rates as well, for example Indonesia.
Trigo Paz said the dollar has recently weakened by one-third, presenting potential currency gains. 'With the ability to clip the coupon and total return from forex at 7% you could end up with a 14% return this year,’ he said.
He did caution investors fundamentals that many emerging market countries may continue to weaken as a result of income shocks, which are becoming more idiosyncratic.
‘Fundamentals are still on the path to deterioration but current account and trade balances are starting to turn around. Although this is not happening for the right reason, as those countries are importing less, but at least it is the start of the healing and adjustment process,’ said Trigo Paz.
He added that in the counties such as Brazil, where the funds he oversees have positions, the trade balance has had a positive turnaround. This is despite the political situation remaining very complex.
Elsewhere, Trigo Paz also favours countries such as Indonesia and Russia. ‘Russia has very strong fundamentals and even with such a low oil price we think their currency is able to adjust,’ he said.
He also added that strong fundamentals are an advantage of such country such as Turkey. However, he said, the effects of the low oil price haven't fed through to the country's economy yet.