Morgan Stanley (NYSE:MS) is bullish on local currency debt of emerging market after getting confidence from Indonesian and Malaysian currencies. Since the start of fourth quarter 2015 (4QFY15), the Indonesian currency has appreciated 10.3%, Malaysian currency surged 5.7%, while the Indian currency weakened by 3.1%. This makes Indonesian and Malaysian securities very attractive amongst emerging markets.
Domestic sovereign bonds are expected to perform better than dollar-denominated counterparts, according to Morgan Stanley investment management. Oil prices are expected to bottom out soon due to which the demand for high yielding assets will be increased.
The most attractive interest rates are offered by Indonesian and Indian notes amongst Asia’s biggest economies. This is because their central banks have room to cut interest rates.Morgan Stanley awaits the right time to overweight on such securities. It’s a fact that valuation of developing countries’ debt is too cheap; due to slow growth in these countries, the valuation is likely to be on a weaker side for a significant time. Chinese authorities have shown some signs of stability by sustaining yuan and attracting investors. The Chinese economy is still in turbulence and is not expected to recover anytime soon.
The government in India and Indonesia are head-on-head to meet the macro challenges their economies are facing; Morgan Stanley analysts expect that these measures will help these economies to meet future challenges. They will also benefit from their diversified exports due to which slow demand from China will have minimal impact on them.
Malaysian Ringgit and Indonesian Rupiah have recovered from their worst days and are now regarded as the best performing currencies. On the other hand, the 10-year local currency bonds yielded in India and Indonesia yielded 7.62% and 8.14%, respectively. That is way more than what other developed markets have to offer.
The average yield demanded over 10-year US Treasury for taking the risk of emerging market debt is 4.99%; emerging market debt is cheap and it offers better yields. But the fundamentals of these securities still remain questionable.
Low oil prices have benefited those countries which have high oil demand, and most importantly those countries, who remained unaffected by the recent turmoil. Malaysia, India, and Indonesia perfectly fit in both the criteria.
Indonesian Rupiah will surge more in coming weeks as Indonesia has built a significant number of foreign-exchange reserves. Year-to-date (YTD), Rupiah has surged 3.8%, which the highest appreciation of any Asian currency. This is one of the reasons why a number of Indonesian global funds have increased by $2.1 billion this year. The funds also showed interest in the Indonesian equity market as they have increased investment in equities by $155 million.