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New institutional investor insights

Diversification is our highest-conviction idea. Institutional investors need to broaden market exposure to more opportunities and risks to reach long-term objectives in today's low-yield environment.

Best ideas
  • We continue to like local markets across several markets as well as dollar-denominated debt in both investment grade and select high yield countries.
  • Some of these countries include Ukraine, Egypt and Brazil where we remain favorable on the reform agenda, and the likes of Indonesia and Peru, which offer macroeconomic policy stability.
  • We also see opportunities in some of the less well-known markets, such as Uzbekistan, Jamaica, Angola and Bermuda.

markets debt

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.

Portfolio context

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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The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature.

Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.

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