Emerging Market Bond Rally to Continue

cristo_redentor_brazilTAIPEI (Reuters) – Manulife Financial Group’s (MFC.TO: Quote) fund arm is overweight in emerging local currency bond markets such as Indonesia and sees the current rally in them continuing for “multiple years” thanks to the robust growth of China’s economy.

Manulife Asset Management favors Indonesian, Philippine and Brazilian local currency corporate bonds, with a big slowdown in Chinese GDP among the few risks that would stop their rally, said Barry Evans, chief investment officer for global fixed income.

“I think local currency market is here to stay for multiple years,” Evans told reporters during a visit to clients in Taiwan.

“What is to keep us awake at night would be a dramatic slowdown in China’s GDP.”

Manulife Asset is underweight the U.S. bond market as the U.S. economy is recovering much more slowly than emerging economies.

“Asia is the engine for growth, the U.S. is the caboose,” said Evans. “One of the major themes is chasing markets that have inflation, and we are not a fan of U.S. interest rates.”

Manulife Asset manages about $200 billion in client assets, about $49 billion of which is invested in bond funds, it said.

The Philippine peso and South Korean won led a broad rise in Asian currencies on Monday, helped by the yuan’s rise to a post-revaluation high and encouraging data from China and the United States.

The strong economic growth in emerging countries is putting their companies in a better position to pay off debts and pay higher yields.

High-yield corporate bonds in emerging nations are expected to have a default rate of 2 percent in the next 12 months, versus a 4-6 percent average in the last few years, Evans said.