“So far local currency has performed 2.3-2.5 per cent year-to-date so it’s actually beating my bearish expectations,” he admits. “We are still seeing opportunities in hard currency debt, although they are relative opportunities versus US investment grade and Europe investment grade where the spread is still very attractive. But now I think most of the rally price has happened.”
But MFS Investment Management has a cautious outlook on local currency. The firm states: “With the prospect of Fed tightening in the not-too-distant future, we would stay strategically cautious on local currency, while ready to capitalise on tactical opportunities in the currencies of economies with strong or improving capital and current account balances.”
There are clearly returns to be had from investing in emerging market debt assets so investors may want to look at being exposed to both local currency and dollar-denominated emerging market debt as part of a diversified and balanced portfolio.
Ellie Duncan is deputy features editor at Investment Adviser
LOCAL CURRENCY VS DOLLAR DENOMINATED
Local currency
Countries: More advanced emerging market countries tend to issue debt in local currencies
Pro: Local currency EM debt is not aligned with international markets or any movement in US Treasuries
Con: Local has slightly underperformed hard currency in the past year with returns of 2.3-2.5 per cent year-to-date
Dollar denominated
Countries: Typically, less developed frontier market countries will turn to international markets for issuance
Pro: Hard currency has generally outperformed local currency debt in the past year and can form part of a diversified portfolio
Con: Dollar-denominated debt is, to some extent, at the whim of any movements in international markets
