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18 July 2019

Emerging market debt strategy

IN BRIEF

  • We expect continued solid returns for emerging market debt (EMD) over the next six to 12 months, driven by healthy fundamentals, a supportive net issuance level and attractive valuations. Our base case scenario is a 10.9% dollar return for hard currency in 2019, or 6.2% for the next 12 months. For local currency, our models suggest a base case of around 6.2% for the year, or around 7% over the next 12 months.
  • Our core scenario for EMD returns assumes a soft landing for the end of the US economic cycle, including two interest rate cuts. The growing threat of a trade war between the US and China increases the risk of a US recession, which would negatively impact global growth and our returns expectations. However, we observe that a US reflation scenario would negatively impact EMD returns, largely due to expected dollar strength.
  • We have reduced our estimates for emerging market (EM) growth, including China. However, we believe the heavy stimulus from the Chinese government will offset much of the negative effect of increased tariffs. At the same time, increased social and infrastructure spending could improve Chinese competitiveness through improved transport and manufacturing infrastructure.
  • The current environment of slower growth is likely to ease inflationary pressures and allow EM countries more flexibility in their monetary policies. We also think the US dollar is trading slightly rich on a trade weighted basis, but that this strength could fade in the second half of 2019, which would be positive for EMD.

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18 July 2019
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Pierre-Yves Bareau

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