FameEX Hot Topics | Shift in Emerging Market Investor Preferences: Dumping Dollar-Denominated Debt in Favor of Local Currency Bonds

According to EPFR Global, an insights company specializing in fund flow and allocation data, emerging market investors are increasingly favoring local currency-denominated bonds while moving away from dollar-denominated debt. The performance of currencies like the Brazilian real and the Mexican peso, which have appreciated against the U.S. dollar, has contributed to the attraction of local currency bonds.

Data provided by EPFR Global reveals that during the first four months of the year, investors withdrew $2.65 billion from emerging market bonds denominated in U.S. dollars. In contrast, investments in local currency-denominated emerging market debt increased by $5.23 billion during the same period. This shift in investor preference from hard currency to local currency bonds is driven by the outperformance of the latter.

Market analysts anticipate that this trend will persist as the strength of the U.S. dollar faces challenges such as potential debt defaults and volatility in interest rates. Paul Greer, an emerging markets debt portfolio manager at Fidelity International, expects local markets to continue outperforming external debt throughout the year. Thanos Papasavvas, chief investment officer at ABP Invest, points out the divergence between emerging market local and hard currency bonds, with local currency debt appearing more attractive from both a fundamental and valuation standpoint.

Several factors contribute to this shift in investor preference. One key factor is the appreciation of certain local currencies against the U.S. dollar. Notably, the Mexican peso and the Brazilian real have appreciated by more than 10% against the U.S. dollar. Additionally, the proactive measures taken by some central banks in emerging economies, such as raising interest rates to combat inflation, have improved the real yield offered by these local currency bonds. For instance, Brazil and Mexico have implemented interest rates of 13.75% and 11.25%, respectively, with corresponding inflation rates of 4.15% and 5.3%.

However, some analysts caution that market confidence remains low, leading investors to hold cash while awaiting favorable signals to reinvest in these instruments. The cautious approach suggests that despite the attractiveness of local currency bonds, there is still some apprehension among investors.
In summary, emerging market investors are increasingly favoring local currency-denominated bonds over dollar-denominated debt. The performance of local currencies and the improved real yield offered by these bonds, driven by proactive central bank actions, contribute to their appeal. While this trend is expected to continue, low market confidence has led investors to hold cash until more favorable market conditions emerge.

Disclaimer: The information provided in this section is for informational purposes only, doesn't represent any investment advice or FameEX's official view.