World Economy

EM Assets Back to Life

EM Assets Back to LifeEM Assets Back to Life

The best rally in emerging-market stocks and bonds in seven years is sending bears back into hibernation.

Short interest in the largest exchange-traded fund tracking developing-nation dollar-denominated bonds has fallen to 2.2% of shares outstanding, near the lowest level since 2012, from 13% in mid-February, according to data compiled by Bloomberg and Markit Ltd. Bearish bets on BlackRock Inc.’s $26 billion emerging-market stock ETF have tumbled 2.9%, from 15% in January.

Developing-market assets this month have extended a rally started in March as China’s economy stabilized, commodity prices rebounded and the Federal Reserve signaled it would go slow in raising US interest rates. Traders added more than $1 billion to US-traded emerging-market stock and bond ETFs this month through April 15, pushing the total inflow this year to $4.5 billion, following an exodus in 2015, data compiled by Bloomberg show.

“We’ve passed the low point,” Jens Nystedt, a New York-based emerging-market debt manager at Morgan Stanley Investment Management, which oversees more than $400 billion, said by phone. “EM fixed income is still cheap, even after the rally.”

  BlackRock ETFs

BlackRock’s $6 billion iShares ETF tracking emerging-market dollar bonds has gained 6.5% this year, double the return of US Treasuries. The stock ETF rose to a five-month high last week, extending the advance to 22% from its low in January.

Emerging-market dollar debt last week yielded 3.9 percentage more than US Treasuries on average, compared with five-year average of 3.4 percentage points, according to data compiled by JPMorgan Chase & Co. In the local-currency bonds, the rally pushed the yields to a one-year low of 6.4%.

The International Monetary Fund last week lowered its 2016 growth projection for developing countries to 4.1%, from 4.3% in October. It still points to a pickup from 4% from 2015, which was the slowest expansion since 2009.

Bond investors at Goldman Sachs Asset Management concurred that the “accommodative” global monetary policies are “positive” for “selective exposure” to emerging-market debt. China poses a risk as its monetary fiscal stimulus to shore up growth threatens the long-term stability in its financial system, the fixed-income group said in its outlook report for the second quarter. They’re hedging that risk through credit-default swaps and taking a short position in Asian currencies versus the Russian ruble.