From crisis to Goldilocks

25 April 2019

Emerging market debt strategy

IN BRIEF

  • We enter the second quarter with a constructive view on emerging markets debt (EMD). In our view, the combination of a dovish Federal Reserve (Fed)*, Chinese stimulus and a stable servicing backdrop should lead to a stable returns profile for the remainder of the year.
  • That said, we remain mindful of valuations, as the market has adjusted expectations rapidly. One of the principle reasons for this adjustment has been the Fed’s signal that we’ve reached the top of the US rate cycle, which should constrain any potential dollar appreciation while flagging an absence of inflation in the US economy. Solid US growth against a relatively benign inflationary backdrop supports a base case expectation for a soft landing.
  • Another contributing factor is that the trade tensions between the US and China appear to be moving towards a resolution, which could prove a positive catalyst for the emerging world. A Sino-American trade agreement may arrive just as the Chinese economy begins to show the positive impact of the stimulus programme launched in response to rising trade tensions with the US, potentially enhancing a recovery in Chinese activity levels.
  • For us, a key question emerges around how front loaded 2019 will prove to be, given the range and breadth of risk faced by investors in the EMD space. Given a steady progression, our soft landing scenario looks for high single-digit full-year returns for both hard and local currency bonds.

* Federal Reserve is the US central bank that regulates the monetary and financial system of the United States of America.

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25 April 2019
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Pierre-Yves Bareau

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