Morgan Stanley has joined other Wall Street banks in turning more optimistic about bonds issued by emerging market countries. However, the bank's strategists remain cautious about the currencies of developing economies given the strength of the U.S. dollar.
Morgan Stanley upgraded its view on emerging market local currency bonds to "bullish" from "neutral" based on the prospect of interest rate cuts by emerging market central banks. The strategists estimate total returns for these bonds could reach around 2% by year-end.
However, Morgan Stanley says emerging market currencies could lose around 2% against the U.S. dollar this year. While carry and bond price gains have benefited investors so far, a strong dollar has offset some of those gains.
Other banks have also turned more positive on emerging market bonds. JPMorgan moved its recommendation on these bonds to "overweight", citing the prospect of emerging market central banks beginning cutting interest rates. Still, JPMorgan remains neutral on emerging market currencies overall.
After aggressively raising rates in 2021, some emerging market central banks have recently started cutting rates, signaling a turning point in the monetary policy cycle. Hungary became the first European central bank to ease policy, while Uruguay cut rates first in Latin America.
