In a ‘what to watch in 2016’ note to investors, Brandywine said the best opportunities in the current low-yield environment could be emerging market assets.
Importantly, the attraction of emerging market currencies and select sovereign bonds will persist in 2016 “irrespective of any rate normalisation policies from the US Federal Reserve or Bank of England”.
“We are therefore interested in higher-yielding sovereign bonds from countries with higher perceived risk,” said Brandywine.
“Mexico is an example where we believe risk is already priced into the country’s bonds and currency and its fundamentals do not warrant current valuations,” it said.
Mexico is an emerging market country that has had a structural economic overhaul, as well as a “credible” central bank, said Brandywine.
“In addition to Mexico, we have a positive outlook on Brazil, India and Indonesia.”
Accommodative monetary policy and central bank “activism” will be the catalysts that will allow emerging market bonds to rally, said Brandywine.
“While falling emerging market yields are part of a longer-term theme, we think the opportunity for currency appreciation is on the horizon,” it said.
“The upcoming year should see G3 monetary policies diverge as the European Central Bank announced tentative plans to extend its quantitative easing program and the Japanese economy has fallen back into recession.
“This boost in liquidity could find its way to the higher-yielding emerging market space.”
Additionally, the US dollar rally has quite possibly reached its peak, said Brandywine.
“Any depreciation in the US dollar should help stabilise commodity prices, which is another benefit to the emerging market world,” it said.
