Opportunities and positioning
We remain constructive on emerging markets debt due to a supportive macro environment and relative valuations versus developed markets. Many aspects of emerging markets — hard currency sovereign and corporate credit, local currency bonds and foreign exchange — remain attractive relative to developed markets.
We continue to expect further rate cuts in many economies where inflationary pressures remain benign or are falling, which will continue to support growth. Looser monetary policy at core central banks should continue to drive inflows and limited net new issuance in external debt markets should also continue to support the asset class. Being nimble and selective will remain key.
The returns on local markets may be boosted more by currency than duration if we were to see the U.S. dollar moving sideways or weakening. We think the U.S. dollar may begin to get weighed down by rising valuations, stabilizing global growth, room for further Fed cuts and posturing by the U.S. government.
Risks to our outlook
The trade war creates uncertainty and hurts global trade and manufacturing, which tends to be a large part of EM economic and market performance. Emerging markets will struggle to outperform if trade tensions escalate, but they will respond well amid signs of any improvement in relations between the U.S. and China.
Emerging markets economies and issuers could come under pressure if we see substantial and sustained increase in U.S. treasuries or the U.S. dollar.
Emerging markets offer opportunities for investors seeking the longer-term value risk premium. An allocation to debt markets provides less volatile exposure to the value risk premium and to the EM growth premium relative to developed markets.
With rates in developed markets expected to remain range-bound, we look to access U.S. rates duration and better-quality adjusted spread duration using hard currency EM debt as opposed to U.S. high yield bonds.
Local EM debt lends itself well to security selection alpha and remains a good place to spend a portion of a portfolio’s active risk budget.
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