Top Emerging Bonds in China, India

Chinese and Indian bonds are likely to be the best performers in emerging markets as U.S. borrowing costs start to climb, say JPMorgan Asset Management and Invesco.

China will probably cut interest rates “sooner than most market players expect” to support economic growth, said Robert Waldner, head of multi-sector fixed income at Invesco. Indian Prime Minister Narendra Modi’s economic policies and high yields are luring investors amid slowing inflation, according to Pierre-Yves Bareau, the London-based head of emerging-market debt at JPMorgan Asset, which manages $1.7 trillion globally.

“On the debt side, flows are going into India and China,” Bareau, who is based in London, said in an Oct. 31 interview in Singapore. “Those two economies are big targets for people like us. Yields are attractive in India, as well as in China because of deceleration” of the economy, he said.

All but one of 24 emerging-market currencies weakened against the dollar in the past three months as the Federal Reserve wound down monetary stimulus that fueled demand for higher-yielding assets. U.S. policy makers are forecast by economists to begin raising interest rates in the second half of 2015, spurring concern capital will be sucked from the developing world.

Ten-year local-currency sovereign bonds yield 3.72 percent in China and 8.24 percent in India, compared with 2.34 percent for U.S. Treasuries. The yuan was the only emerging-market currency to rise against the dollar in the past three months, gaining 1 percent, while the smallest declines were in Hong Kong’s dollar and India’s rupee. The yuan and the rupee ranked among the three developing-nation currencies that handed investors the highest returns including interest.
Mexican Opportunity

JPMorgan Asset and Invesco also tipped Mexican assets to perform well, with Bareau pointing to the nation’s improved debt rating and the strengthening U.S. economy as supportive factors. JPMorgan Asset favors the peso, while Invesco included Mexico’s debt among its preferred investments. Ten-year peso bonds yield 5.88 percent and the currency fell 2.2 percent in the past three months to 13.48 per dollar.

India’s Modi, who won in a landslide election in May, has scrapped diesel subsidies, eased rules for foreign investment in property development and is seeking to end a 40-year state monopoly in mining and selling coal. Consumer-price inflation in India decelerated to 6.46 percent in September, the slowest since at least the start of 2012, as a 24 percent slump in Brent crude prices since June 30 helped cut import costs.
China Slowdown

The People’s Bank of China has cut reserve-requirement ratios for some lenders and is pumping cash into money markets to lower funding costs as the economy heads toward its slowest annual growth since 1990. Gross domestic product increased 7.4 percent in the nine months through September.

China’s benchmark one-year lending rate has been 6 percent since July 2012, when it was cut for a second time that year. It will remain unchanged through 2015, according to 15 of 17 analysts in a Bloomberg survey published last week. Two forecast a reduction.

India, China and Mexico offer “pockets of opportunities,” Atlanta-based Waldner at Invesco, which oversees $789.6 billion, said in an interview in Hong Kong on Oct. 31. “With the decline in commodity prices, it’s very positive for India. Inflation is low for China. Weak growth with benign inflation means there’s a lot of room to support the economy” in China, he said.

Foreign funds have poured a net $22.5 billion into India’s onshore government and corporate bonds this year, data compiled by Bloomberg show. Overseas entities increased bond positions in China for nine consecutive months, with holdings rising 6.7 percent in September to 634.1 billion yuan ($104 billion) in the biggest gain since March, according to PBOC data.
Peso, Ruble

Mexico is set to be Latin America’s top automobile producer this year for the first time in more than a decade, fueled by factory openings as carmakers boost exports to the U.S., according to researcher and consultant IHS Automotive.

An overhaul of Mexico’s energy laws by President Enrique Pena Nieto prompted Moody’s Investors Service to raise the nation’s debt rating in February to A3, one level above rankings from Standard & Poor’s and Fitch Ratings. The peso is “cheap” and the country will probably win another ratings upgrade, JPMorgan’s Bareau said.

Both Invesco and JPMorgan Asset are wary of Russia’s ruble, which lost 18 percent in the past three months in the worst emerging-market performance. The currency fell as sliding oil prices hurt the world’s biggest energy exporter amid U.S. and European economic sanctions following President Vladimir Putin’s incursion into Ukraine this year.

“We are heading toward an environment where there would be more differentiation” among emerging markets, JPMorgan’s Bareau said. “We want to go with those with a strong balance sheet, and those exposed to manufacturing and the U.S., rather than commodities and Europe.”

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