Emerging Markets Selloff Spurs Contrarian Bets on Central Bank Rate Cuts

Emerging Markets Brink of Worst Month Since 2022

Key Takeaways:

• TT International and AllianceBernstein are betting on emerging-market bonds and securities, anticipating central banks to cut interest rates to prevent a growth shock.
• This contrarian view is driven by expectations that central banks will prioritize offsetting recession risk over inflation concerns.
• Investors are in the minority, with emerging stocks falling 10% this month and average yields on local-currency bonds reaching their highest levels in almost two years.

Investor Strategies:

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• Jean-Charles Sambor, head of emerging-market debt at TT International Asset Management, has started buying emerging-market credit and local bonds, including Polish and Czech local-currency bonds and dollar-denominated Venezuelan and Lebanese securities.
• Christian DiClementi, director of emerging debt at AllianceBernstein LP, sees buying opportunities in markets with the steepest declines, although he declined to disclose specific trades.

Market Trends:

• Emerging stocks have fallen 10% this month, while average yields on local-currency bonds have risen to the highest in almost two years.
• Energy importing nations have seen even bigger selloffs, with bond yields jumping by 50-100 basis points in Poland, South Africa, and Thailand.
• Some currencies have slid more than 5%.

Central Bank Outlook:

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• The Federal Reserve is seen as biased towards offsetting recession risk, which may lead to a dovish tilt if the oil price shock intensifies.
• JPMorgan Chase & Co. strategists have trimmed their wagers on a Federal Reserve rate increase, now seeing a less than 50% chance of a hike this year.

Fundamental Analysis:

• Benoit Anne, head of market insights at MFS Investment Management, believes emerging markets are due a rebound later this year, citing fundamental improvements across the developing world.
• Anne notes that emerging markets were a victim of their own success and that this is ultimately a very attractive entry point to re-establish bullish positions on EM.