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FameEX Hot Topics | Emerging Market Investors Opt for Local Currency Bonds, Abandoning Dollar-Denominated Debt

2023-05-24 17:01:35

Emerging market investors are gravitating towards local currency-denominated bonds while divesting from dollar-denominated debt, according to EPFR Global, an insights company specializing in fund flow and allocation data. The attractiveness of local currency bonds has been propelled by the appreciation of currencies like the Brazilian real and the Mexican peso against the U.S. dollar.

EPFR Global's data shows that investors withdrew $2.65 billion from U.S. dollar-denominated emerging market bonds in the first four months of the year. In contrast, investments in local currency-denominated emerging market debt increased by $5.23 billion during the same period. This shift reflects investors' growing preference for local currency bonds due to their superior performance.

Market analysts predict that this trend will persist as the U.S. dollar faces challenges such as potential debt defaults and interest rate volatility. Paul Greer, an emerging markets debt portfolio manager at Fidelity International, expects local markets to outperform external debt throughout the year. Thanos Papasavvas, chief investment officer at ABP Invest, highlights the divergence between local and hard currency bonds in emerging markets, emphasizing the more favorable fundamentals and valuations of local currency debt.

Several factors contribute to this shift in investor sentiment. One key factor is the appreciation of certain local currencies against the U.S. dollar. Notably, the Mexican peso and the Brazilian real have witnessed appreciation of over 10% against the U.S. dollar. Additionally, proactive measures taken by central banks in emerging economies, such as raising interest rates to combat inflation, have bolstered the real yield of local currency bonds. For instance, Brazil and Mexico have implemented interest rates of 13.75% and 11.25%, respectively, with corresponding inflation rates of 4.15% and 5.3%.

However, some analysts caution that market confidence remains low, leading investors to hold cash while awaiting favorable signals to reinvest in these instruments. Despite the attractiveness of local currency bonds, lingering apprehension among investors persists.

In conclusion, emerging market investors are increasingly favoring local currency-denominated bonds over dollar-denominated debt. The performance of local currencies and the enhanced real yield of these bonds, driven by proactive central bank actions, contribute to their appeal. While this trend is expected to continue, low market confidence has prompted investors to maintain cash positions until more favorable market conditions emerge.

Disclaimer: The information provided in this section is for informational purposes only, doesn't represent any investment advice or FameEX's official view.

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