(Bloomberg) -- The Reserve Bank of India’s willingness to defend the rupee makes the country abrdn plc’s top bet in Asia, on the expectation that protection of carry gains will help the country’s assets outperform.
The South Asian economy’s relatively low correlation with the US and attractive bond valuations also make the nation’s notes among the asset manager’s top weightings in emerging markets, said Kenneth Akintewe, head of Asian sovereign debt.
“Fixed income looks a lot more like a carry-trade play next year in emerging markets,” Akintewe said in an interview, referring to the phenomenon where an investor borrows capital at lower rates to invest in assets that may offer higher returns. “Your carry is protected” via returns from bonds, as the rupee’s depreciation is limited versus the dollar.
A stronger dollar leaves an emerging market’s higher-yielding assets vulnerable to a wipeout if their currency depreciates too much. Countries with more controlled foreign-exchange policies, such as Egypt and Nigeria, are attracting investor interest, while those with fully free-floating exchange rates, like Mexico and Brazil, are experiencing high volatility.
Investors are searching for assets that might be less affected by Donald Trump’s US presidency amid uncertainty over how much of his campaign rhetoric will be implemented. If Trump is able to enact policies like his proposed tariffs, that may create a more risk-off environment in emerging markets and boost the dollar further.
The RBI’s policy of using its nearly $700 billion of reserves to smooth out currency volatility has meant the rupee remains one of the least volatile in emerging markets, even while offering among Asia’s best yields.
Carry will continue to be a key driver of relative performance among developing-market currencies, with the high carry-to-volatility rupee seen outperforming in Asia, Goldman Sachs Group Inc. strategists including Kamakshya Trivedi wrote in a note.
The fact that the central bank is pushing back against rate cuts means that investors aren’t front-running expectations, helping keep yields above policy rates, said Akintewe. He has managed money in Asia for two decades, was one of the early foreign investors in India’s bond markets and runs a debt fund which focuses on the South Asian economy.
“Valuations, low volatility, low correlation to global risk sentiments and other asset classes” are the key points, said Akintewe.
The RBI can start easing rates from the first quarter of next year if inflation begins to slow, which can also result in capital gains, he said.
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