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Ignore Tr(i)umphalism – focus on the individual issuers
Diliana Deltcheva, head of emerging market debt, Candriam Fawzy Salarbux, global head of consultant relations, Candriam
Emerging market debt has suffered a bout of volatility in the past year. Investors should seek reassurance in a stockpicker’s ability to select and combine individual countries and companies
What should investors expect from their emerging market debt portfolios over the next 12 months?
Our headline return on a one-year horizon for EM hard currency (HC) and local currency (LC) is 6%. Whilst not spectacular, that figure is relatively attractive, given current levels of uncertainty across financial markets.
We do not expect much EM growth in the coming months. Growth has been anaemic across emerging and developed countries, with the exception of the US but trade wars are raising the possibility for a US downturn as well. For EMD HC and EMD LC, we would expect 6% returns as we conservatively expect that at least the carry of each asset segment will be realised. This is not a case, however, of simply surfing markets’ strong returns since Decem-
ber. We focus in generating value through an active, bottom up approach. We typically favour countries or companies with improving fundamentals, attractive valuations and limited risks from a political or ESG standpoint.
Institutions considering dynamic asset allocation should also note that spreads on EMD HC looks more promising than the lower-rated investment grade bonds (‘B’ and ‘BB’) issued by companies in devel- oped markets.
Less trade war related sabre-rattling ahead
On the hottest talking-point of the moment, we do not expect trade wars to escalate sharply. The poor reaction of equity markets to the announcement of further tariffs from China and the US will, we believe, curb politicians’ sabre-rattling and encourage more negotiations instead. That does not mean geo- political risk is insignificant for emerging market debt. But we are not on high alert.
We remain cautiously optimistic on EMD HC as we believe that we still have two supportive factors at play. The first is the US Federal Reserve - deciding to hold or even cut instead of raising interest rates in 2019. This is encouraging news for emerging economies in need of more breathing space on the road to recovery. The second is a constructive outlook for commodities, the lifeblood of so many emerging economies and their leading companies.
Local currency bonds are still trading at attractive risk premiums to US treasuries. EM inflation remains subdued and some EM central banks might have space to ease policy in 2019. EM currencies appear cheap but will require broader and deeper global growth recovery as well as a weaker US dollar to perform.
22 June–July 2019 portfolio institutional roundtable: Emerging market debt
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