Emerging Markets Credit View: More Of A Carry-Type Year For The Next 6 Months

By Steve Drew

Steve Drew, Head of Emerging Market (EM) Credit, explains why the current macro backdrop for emerging markets should remain benign and where he sees the sweet spots for investments in his asset class. While he expects some kind of volatility spike before the year-end, most likely from geopolitical developments, given the strong fundamental and technical picture in the asset class, he believes it will prove to be a buying opportunity.

Key points:

  • Both fundamentals and technicals are strong in emerging markets.
  • Rate hikes in the US probably limited to just one more for the near future.
  • The US dollar will likely remain stable to weak, benefiting EM currencies and hence EM debt.
  • Current sweet spots of investments look to be in BB emerging market credits.

I think the macro backdrop is going to continue to be benign, principally because we don’t see pickup in volatility either caused by policy mistake in terms of interest rates being raised too much. We are pricing another one interest rate hike and then we priced it as the end of the cycle. We think the dollar is going to remain stable to weak, which is actually good for emerging currencies and therefore, emerging debt. We think the commodity and oil cycle is likely to be more of a range and therefore, we don’t see a pickup in volatility really causing a material negative outcome for emerging markets.

I think the best opportunities right now where we see the sweet spot, if you like, is more in the BB space. That will take us more towards Latin America, so parts of Mexico, Brazil, Argentina, Turkey and CEEMA (Central and Eastern Europe, Middle East and Africa) and parts of Asia, more Indonesia, the Philippines. Overall, we think it is more of a carry type of year or for the next six months.

I think it has been a very strong year. Started the year on a weak footing in January, but since the middle of January, it has been extremely strong. I will be surprised if we end the year without some type of volatility spike. It is probably geopolitical; it is probably concerned around the macro economy. However, the fundamentals and the technicals within emerging markets were extremely strong.

Foreign securities are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets.

Emerging market investments have historically been subject to significant gains and/or losses. As such, returns may be subject to volatility.

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