GMO continues to have confidence in its once-in-a-generation recommendation on emerging market local debt, saying the trade and economic policies of US President Donald Trump’s administration make the bet even more attractive.
The firm first made the call in January 2024. Since then, the index tracking EM local currency government debt returns has risen more than 10%, outperforming the roughly 5% gain in investment-grade debt over the same period. However, the performance still lags behind the S&P 500, which has advanced 27%, and MSCI’s all-country stock index, up 25%.
Now, GMO sees room for further gains, citing valuations, diversification considerations, and potential for outperformance.
“Our conviction has been strengthened by the -Trump administration’s trade and economic policies, which suggest continued dollar weakness and relative strength for EM local currencies,” Victoria Courmes, a portfolio manager at GMO, wrote in a note Monday. “We continue to believe we are seeing a rare opportunity in EM local debt.”
Money managers around the world, grappling with uncertainty surrounding US policy, are increasingly seeking investment alternatives — and emerging-market local debt is one area that looks attractive to many. The swelling US budget deficit and weaker dollar are also prompting the movement.
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Outperforming EM Debt | Return of EM Bond is higher than the wider gauge
Current interest rates are essentially back to the average between 2004 and 2011, offering high total return potential above spot currency appreciation, according to GMO.
“It’s extremely rare to get this combination of cheap currencies with high rates – and it doesn’t generally last long,” Courmes wrote.
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GMO isn’t the only firm seeing potential for the asset class in coming months.
“Beyond the near term, we think that the picture should turn more constructive for EM local rates later in the second half of the year, as we get closer to rate cuts from the Fed and given our view of a more meaningful downside in oil prices,” strategists at Goldman Sachs Group Inc. including Tadas Gedminas wrote in a note on Monday.
