Emerging market debt: Cautiously optimistic
What the US gives to emerging markets with one hand, it takes away with the other. In March, the Federal Reserve announced that interest rates are unlikely to rise this year. The weaker dollar that resulted from such a dovish stance has been welcomed by developing nations, but that’s where the good news ends. In May, President Trump upped the ante in his trade war with China by increasing the tax on various Chinese products entering the US to 25%, up from 10%. Beijing was quick to retaliate by slapping a new levy on more than 5,000 goods moving in the other direction. A trade war between the world’s two largest economies is going to have an impact on many other countries, especially those that are dependent on exports. A further escala- tion could dent confidence in the ability of emerging market sovereigns and companies to repay their debts.
Investors appear to have shrugged off such concerns in the first half of the year with the level of capital looking for a home in emerging market debt increasing. It’s not hard to see why. With investment-grade debt offering low or even negative returns, the favourable demo- graphics, improving corporate fundamentals and huge growth that emerging markets are forecast to provide over the next decade make the lure of developing market credit hard to resist.
Indeed, some of the participants at the emerging market debt roundtable I hosted in May believe that there is the potential for double-digit returns from the asset class this year. But it’s not that simple. Emerging markets are particularly sensitive to bad news and so volatility comes with the territory. An election result, lower demand for commodi- ties, China’s economy slowing, a falling oil price or decisions made in the US’ Federal Reserve can push asset prices up or down. A negative headline is enough to spark a sell off as some investors have been guilty of judging all emerging market countries to be the same. So, if China’s economy is slowing down, for example, some believe that the same is going to happen in Indonesia. With the cons of investing in this asset class just as strong as the pros, we brought vari- ous players in this sector together to discuss some of these issues. You can read the debate from page 4.
Mark Dunne Editor, portfolio institutional
Contents
P4: Emerging market debt roundtable
Asset owners, managers and analysts explain why they are cautiously optimis- tic on this asset class.
P22: Ignoring Tr(i)umphalism Candriam explains that following the volatility that hit emerging market debt in the past year, investors should seek reassurance in a stockpicker’s ability to select and combine individual countries and companies.
P24: An outlook for South America Santander Asset Management outlines its predictions for debt issued with a Latin flavour.
P26: EM debt: A new dawn After having a 2018 to forget, the stars appear to be aligning for emerging markets once again. Elizabeth Pfeuti reports.
June–July 2019 portfolio institutional roundtable: Emerging market debt 3
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