By Tom Arnold
LONDON (Reuters) - Fund manager Ashmore Group has bought Brazilian and Chinese local currency bonds as it remains focused on broader emerging market local debt, betting on strong performance during 2021.
Brazilian markets have had a tough start to 2021, with local currency bonds selling off by around 170 basis points and the real currency sliding 7% against the dollar as concerns about politics surfaced and as the country battles the world's worst daily COVID-19 death toll.
Ashmore, with assets under management of $93 billion at the end of 2020, was buying Brazilian local bonds, in part due to the belief that there was "too much political risk premium" priced in, Gustavo Medeiros, Ashmore's deputy head of research told Reuters.
"The BRL (real) terms of trade are extremely strong and the currency is close to its weakest level since 2002 in real effective exchange rate terms when Brazil had a balance of payments crisis," he said in an interview.
Some investors have worried about political interference after the exit of the heads of state-owned companies Petrobras and Banco do Brasil following tussles with President Jair Bolsonaro. The prospect of leftist former president Luiz Inacio Lula da Silva seeking election next year is heaping pressure on Bolsonaro to boost social spending, potentially diminishing chances of reform.
Ashmore is also buying up Chinese local currency bonds, said Medeiros.
Amid investor worries about rising U.S. Treasury yields, Chinese government bonds (CGBs) have proved to be one of the safer havens. They delivered a return of 0.3% during the first quarter, compared to negatives of 6.7% in JPMorgan's Government Bond Index Emerging Markets Global Diversified and 2.3% in five-year U.S. Treasury bonds.
China's inclusion in the FTSE World Government Bond Index (WGBI) from the end of October this year is expected to suck in billions of dollars of inflows into the world's second-largest economy.
"We quite like China (local currency bonds) and have added exposure there. We see structural inflows on the announcement of the (WGBI) index inclusion," said Medeiros.
"The announcement is part of a bigger story that will mean the renminbi will be a larger part in portfolios as China opens up its capital accounts," he said, referring to the Chinese yuan, also known as the renminbi.
Foreign holdings of CGBs dipped in March for the first time since February 2019, according to Reuters calculations, as higher U.S. yields and the prospects for a global recovery had put pressure on China's currency and Chinese yield premiums.
China's external accounts were solid and the current account surplus should remain strong due to higher U.S. demand and subdued Chinese tourism abroad, said Medeiros.
Ashmore continued to like emerging market local currency bonds and, although it had temporarily moved to a "more cautious" stance, still had an "overweight bias", he said.
(Reporting by Tom Arnold; Editing by Susan Fenton)