NEW YORK (Reuters) - JPMorgan (NYSE:JPM) has turned net bullish on hard currency emerging market sovereign and semi-sovereign debt by going overweight on the EMBI Global Diversified index, the Wall Street bank said in a sovereign credit strategy note.
"We see the risk backdrop as benign for EM sovereigns in a not too hot, not too cold scenario," that should benefit sovereigns, the note said.
Concerns over the impact of the COVID-19 Delta variant on economic activity will limit a rise in core rates, with "more stringent measures stopping short of complete lockdowns" setting up a Goldilocks scenario, JPMorgan said.
EMBIG spreads stood on Thursday at 356 basis points, according to Refinitiv data, which compares to a year-end target of 310 bps at JPMorgan. Spreads widened past 720 bps as financial markets reacted to the first pandemic-related lockdowns in March 2020 and tightened to 330 bps last June.
The overweight call translates to bullish bets on Egypt and Indonesia's state-owned electric utility Perusahaan Listrik Negara (PLN).
Those two join Qatar, the Philippines, Panama, Mozambique, Ghana, Ivory Coast and Colombia on the overweight column at JPMorgan.
"We have firm conviction on tighter spreads rather than strong returns in the next few months, as our base case remains higher (U.S. Treasury) yields, which will dent returns," JPMorgan said. "The confirmation of SDR allocations and cleaner technicals are also supportive of tighter spreads."
The International Monetary Fund said on Monday its largest-ever distribution of monetary reserves, $650 billion, will become effective on Aug. 23.
"Given that EMBIGD spreads are now marginally wider on the year after the widening in recent weeks, we see room for spreads to re-price SDR upside," JPMorgan said.