"It is clear that the tailwinds have arrived," Gary Greenberg, whose Hermes Global Emerging Markets Fund topped 99 percent of peers over the past five years, wrote in a note to investors.
Finding pockets of value after two years of bumper returns has become more challenging. The return differential is telling: Developing-nation dollar debt has rallied 3.8 percent during the past 12 months compared with 30 percent stock gains and 10 percent returns on local notes.
Franklin Templeton’s Michael Hasenstab, best-known for his large one-way bets on emerging-market debt and currencies, said hard currency bonds look " very expensive." He favors local debt from nations undergoing economic overhauls with relative yield advantages such as India, Argentina and Mexico.
Pramol Dhawan, a money manager at Pacific Investment Management Co., said emerging-market currencies look attractive versus bonds given their cleaner positioning, cheap valuations and high carry.
GMO says client interest in developing nations has risen significantly since early 2016, when some questioned why they were even included in their portfolios. The money manager’s forecasting model, which has a 60 percent correlation with actual returns since 1994, predicts 5.9 percent average annualized gains in local currencies for emerging-market value stocks through 2025, according to Kadnar.
"They’re by far the most attractive asset class we can find," he said.
This article was provided by Bloomberg News.