BANGKOK/SINGAPORE — Policy normalization at some of the world’s biggest central banks may have some emerging-market (EM) investors nervous, but Europe’s largest fund manager is sticking to its playbook.

Amundi Asset Management, which oversees the equivalent of $1.6 trillion, is continuing to bet on developing-nation dollar debt as policy makers from the US to Europe start to wind in the easy money that has fueled the emerging-market rally.

Despite the run-up in hard-currency bonds the past few years, the firm still sees value, particularly in Latin America.

“This is our safest asset class, the most defensive asset class,” said Sergei Strigo, co-head of emerging-market debt for Amundi in London.

Bonds are currently in a “really sweet spot,” he said, as “growth is returning but it’s not very high, which means it’s not driving up inflation.”

The clouded outlook for emerging-market currencies has Amundi favoring dollar-denominated notes, assets that have underpinned the surge in developing markets since early 2016.

The Paris-based investment firm is sticking to the position even as local-currency bonds edge ahead, with a Bloomberg Barclays index up more than 10% this year, versus the eight percent gain in hard-currency notes.

Amundi is targeting a mixture of sovereign, provincial and quasi-sovereign bonds, said Mr. Strigo, whose fund has returned 8.9% this year, according to the company. He spoke about the firm’s investment outlook in an interview this week in Singapore:

Which region globally offers the best value?

Latin America, where Amundi has been overweight, said Mr. Strigo, citing cheaper valuations and improvements on the political front. Brazil has become cheap, and the spread between quasi sovereign yields and sovereigns has also widened quite a lot.

“If you look at Asia or if you look at Eastern Europe, there’s still value in Argentina, Brazil and Mexico,” Mr. Strigo said. “Brazil was a very successful trade for us, and that’s really across all asset classes.”

Domestic bonds performed well, with inflation slowing and Brazil’s central bank cutting rates.

Currency stability also helped, he said. Russian debt did well, given the steady ruble. While Turkey and South Africa have become “a bit painful” to trade, people have still made money year-to-date.

Amundi has become more defensive on Venezuela after previously being overweight and holding short-dated debt that matured in April.

“In Asia, we’ve got really two main countries which are liquid: Indonesia and the Philippines on the dollar-denominated bonds,” Mr. Strigo said.

The Philippines, however, is pricey.

“It has great fundamentals, but it has been quite expensive for reasons of abundant dollar liquidity,” he said, citing overseas remittances from overseas workers that are then invested in the country’s dollar debt.

While Amundi sees more value in Indonesia, relative to Latin America it’s expensive.

And China? The firm was a buyer at China’s recent dollar-bond offer, Mr. Strigo said. It was the country’s first dollar-denominated debt sale since 2004: read more about that here.

How will emerging markets fare in 2018?

The biggest risks are from the outside, not inside, Mr. Strigo said.

Uncertainties include Federal Reserve leadership, the outlook for US fiscal stimulus and tax cuts, general ambivalence around the Trump administration and its ability to pass initiatives through Congress.

The prospect of protectionist measures against the likes of Mexico or China also remains a concern.

In Europe, there are risks posed by the European Central Bank tapering its quantitative easing program as well as issues such as Catalonia and Italy’s debt situation.

North Korea is something to keep an eye on, Mr. Strigo said.

There is room for more gains in emerging-market debt as investors haven’t been “massively overweight” on the sector, he said. — Bloomberg