Foley said at the Reuters Global Investment 2019 Outlook Summit in New York that the 360 basis point (3.6 percentage point) average spread on JPMorgan’s Emerging Market Bond Index is only about 10 basis points above its longer-term median. “We’re trading at about 10 basis points wide of fair value,” she said. “I don’t think there’s another fixed-income class I can think of that is trading anywhere near fair value. Most of them are trading expensive to their long-term averages.” Foley, who helps invest $14 billion, said TCW’s total return portfolio carries an average “double-B” credit rating and roughly 7.125 percent yield, far above the sub-3 percent yields from the majority of fixed income investments worldwide. The portfolio began the year with a 15 percent weighting in local currency debt, which TCW pared after yield premiums fell. But Foley said new opportunities could arise if the strong U.S. dollar falls, including if U.S. budget deficit rises. “Local currency could be the surprise for 2019,” she said. Foley said Brazil could offer opportunities after the recent election of right-wing Jair Bolsonaro, who will take office as president on Jan. 1. She said TCW had a market-weight position in Brazil when the election campaign began. That included an emphasis on companies such as Petrobras SA and Banco do Brasil SA that were “shifting from being an instrument of public policy to more profit-oriented,” Foley said. Foley said TCW doubled its weighting in Brazil to 8 percent during the campaign, optimistic about Bolsanaro’s economic policies and the people he installs to implement them. “He has a social agenda that is very unsettling, and I find that difficult,” she said. “On the other hand, he has I think some strong and right thinking around economic issues, and has the support of folks who think these things through. … The big question is implementation.” Foley is also waiting to see if U.S. President Donald Trump imposes tariffs on another $257 billion of goods from China, mainly consumer products, on top of recent tariffs on some $250 billion of steel, aluminum and other imports from there. She said the administration risks alienating consumers who might feel the tariffs more directly at the checkout counter, because there are no intermediaries in supply chains to absorb the higher costs. “It’s a very hard call on whether it will happen or not,” she said. “It’s very hard to trade that kind of market.”
Emerging market debt is a rare fixed-income class that does not look too expensive, and could be an even more attractive investment if the U.S. dollar weakens, according to Penny Foley, portfolio manager for TCW Group Inc’s emerging markets and international equities groups.