JPM Ups EM Debt Exposure, Likes Peru

JPMorgan is moving to neutral from underweight in its EMBIG model portfolio through adjustments that include raising Peru to overweight from neutral. Its portfolio beta rises to 0.99, although the shop also has a high cash balance at 10.4%. JPMorgan already moved Argentina and Venezuela to marketweight from underweight over the past 3 weeks. It meanwhile reduces holdings in very short-dated Mexican debt and rotated to longer-end bonds, but keeps the overall country exposure unchanged. “Our less bearish view on EM sovereign debt is because we believe that the likelihood of a sovereign default is very low, while the yield spread on the EMBIG to 3-month USD Libor has moved back to levels last seen in early 2003 (over 850bp, from a low of 120bp),” says JPMorgan. To raise Peru to overweight, the shop buys $0.5m of the 2025 bond at 101.00. It notes that although ‘33s look slightly cheaper on the curve, it is wary of the higher USD price. “We expect fundamentals to continue to justify the credit’s safe haven status,” says the shop. Peru has been a modest but reliable outperformer over both a year-to-date (+2.9% versus -1.3% for the EMBIG) and 12-month horizon (-2.4% versus -12.3%). JPMorgan sees growth dropping sharply from 9.8% in 2008 to 3.5% in 2009, but says Peru will still see the most resilient growth in the region this year. It also expects a very manageable 2009 fiscal deficit, at around 1% of GDP, notwithstanding a 3 percentage point GDP fiscal stimulus program. “Peru’s balance sheet also remains rock-solid: net public debt is only 12.3% of GDP – well below peers and just one-third the level of 2004. Moreover, the public sector is a net external creditor, with BCRP reserves of $31bn, not only well above the public sector external debt (less than $20bn), but nearly covering the country’s total external debt (public and private),” says JPMorgan.