EMLC VanEck J.P. Morgan EM Local Currency Bond ETF : Bullish and Bearish Analyst Opinions

The speaker explicitly states that the flight to the USD as a safe haven "leaves high yield in currencies, those of emerging market space, particularly very vulnerable." During risk-off episodes driven by geopolitical fear, capital flees higher-risk assets. High-yielding EM currencies are classic risk assets. As the USD strengthens due to safe-haven flows, EM currencies face direct downward pressure from both capital outflows and USD appreciation. The identified vulnerability implies a high probability of underperformance and depreciation for EM currencies as long as the current risk-off, USD-positive environment persists. A swift, peaceful resolution to the conflict that calms markets and reignites risk appetite, prompting a reversal of flows back into EM assets.

Lupin said Brazilian real rates are still very high (nominal rates at 15%), the central bank is anchored, and it has room to cut, making local currency bonds attractive, especially compared to other EMs. Brazil is a commodity exporter sheltered from Middle East shocks, with high real rates providing carry and potential for easing cycles, supported by credible monetary policy. LONG due to high yields, strong fundamentals, and relative safety in the current geopolitical environment. Central bank fails to anchor inflation, geopolitical spillovers affect all EM, or domestic political issues arise.

EM local bonds were one of the best fixed-income sectors last year, have corrected ~5% due to the Iran war, but fundamentals remain strong (high policy rates, falling inflation, prudent fiscal policy). The sell-off is a temporary repricing. High local rates provide room for central banks to cut, and some economies are leveraged to the commodity cycle. The recent drawdown presents a buying opportunity for a sector with attractive yield and fundamental strength. A prolonged war causing sustained risk-off sentiment or a significant strengthening of the US dollar.

He notes that "Emerging market bonds... local currency" are attractive because "the US dollar is in a bear market." If the USD weakens (bear market), unhedged local currency bonds gain value in dollar terms while offering higher yields than developed market debt. Long Emerging Market Local Currency Bonds. A sudden spike in the USD (flight to safety) would crush local currency returns.