Emerging market debt – Roundtable
down to stimulating growth internally. China has huge reserves in its armoury, which is different from most emerging markets, and has pivoted in its five-year plan to rely on consumption, driving GDP growth through the domestic economy rather than relying on exports. You might see a version of that in other EM coun- tries that can rely on internal consump- tion to drive GDP growth.
Would raising interest rates lead to another taper tantrum? Murphy: Not going to happen this time. It is a different world. The taper tantrum on May 25, 2013 – a day that will live in infamy for emerging mar- ket debt managers – came when EM had been in a three-year bull rally. The shock came when the Fed said it was going to reduce purchases on the margin and all the capital that had ran into EM came running back out. Today, people are concerned about rising rates, but not because the Fed’s going to tighten anytime soon. Current accounts are a lot less concerning than they were in
2013 when three to four years of capital inflows headed out. A lot of the capital that flew out of EM in March 2020 equalled the sum that came out in the taper tantrum. So, we have already had the taper tantrum. Capital is slowly starting to come back into EM now, but discussions of taper tan- trum 2.0 completely miss where we are in this environment compared to 2013. Lundgren: The strength of the dollar is important. Our dollar conviction is low. There are opposing forces with stimulus leading to excess dollar supply, and a weaker dollar due to people buying US assets, but which of those two forces will win is the question.
What will happen in emerging markets over the next 12 months? Murphy: I expect asset prices to grind higher with an economic recovery on the way. It is coming in fits and starts, but over the next 12 months the baton will be handed from what has been exceptional US growth to the rest of the world. From a macro perspective,
continued
negative real rates in the developed world will lead to a search for yield, which is usually good for EM.
Where the value comes from is identifying any potential IMF intervention, reforms taking place or upcoming
elections. Andreas Anthis, Pension Protection Fund
I will stick my neck out and say that the dollar is going to be weaker here in 12 months, primarily a function of monetary policy but also a big widening of the trade deficit and the fiscal deficit usually has an impact on the US dollar after about a year or
two. That will give EM another
tailwind. In an absolute sense, emerging markets are cheap relative to their history. In a rel- ative sense, they are extremely cheap compared to more traditional credit, such as high yield or investment-grade corpo- rate. That is going to attract buyers and comes back to the point of why EM is going to grind higher over the next 12 months. Anthis: We expect to see positive returns coming out of emerging markets, on an absolute basis. The question is what will
drive them, will it be local or hard currency. Overall, current flows indicate that local currency is expected to deliver positive returns in the next 12 months. Consensus
expects inflation to come
down from current levels, which is another indication of a positive local cur- rency return. We estimate close to 7%. We expect muted to slightly positive returns on hard currency. Although the flows are in favour and have been muted relative to local currency since the begin- ning of the year, spreads have been quite tight. That does not necessarily imply negative returns.
FX has come back a lot since March 2020, on an inflation-adjusted basis. In the next two to three months, we expect the dollar to appreciate, hence we are not over- weight in emerging market FX. In the longer term, however, we expect EMFX to appreciate further, given that valuations have been so cheap and that the full effect of the twin deficit in the US combined with the elevated banking reserves will drive the dollar lower. de Kock: In emerging markets there is going to be a lot of idiosyncrasy about individual countries and issuers. There is huge divergence in speed of vaccine roll- out and as a result growth recovery stories vary. Across EM, in hard currency, corpo- rate and local currency, we expect to see positive returns over the next 12 months, with a slight favourability towards local currency. From an implementation perspective, we look for a flexible approach, especially with local currency. That is important because of the divergence we are seeing in the recovery from the pandemic. Lundgren: There is little room for spread tightening. It depends on the market, but, in general, you still get a good carry, so we expect positive returns. The fundamental outlook is good. We have talked about inflation, but infla- tion also means commodity prices go up, so this is a positive environment for global risk assets.
Issue 104 | June 2021 | portfolio institutional | 45
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52
