The technical picture in hard currency (HC) Emerging Market Debt (EMD) has a strong positive bias, with substantial year-to-date inflows and limited net issuance in the near term, NN Investment Partners says.
NN IP continues to see the green shoots of more stable – and in some countries even improving – fundamentals in EMs, partially helped by stable commodity prices, especially oil but also industrial metals. In particular, the fundamentals of corporate debt have been improving and NN IP points to an encouraging upturn in the upgrade/downgrade ratio, while valuations still offer value compared to other corporate credit asset classes.
The first quarter of 2017 was a positive one for EMD as an asset class, with strong performances across the board and both HC and local currency (LC) strategies enjoyed continued inflows, which NN IP expects will continue this year.
NN IP notes however that the improvement in fundamentals for EMD HC has to be balanced against valuations that are closer to fair and a potential increase in risk from US policies under President Trump.
Marco Ruijer, Lead Portfolio Manager, EMD Hard Currency, NN IP, commented: “Leading indicators, by and large, continue to point towards a modest acceleration of global economic dynamics in 2017. The combined picture of improving growth amid a benign inflationary backdrop should not be disruptive for fixed income in the near term.
“Importantly, economic growth in EM economies has stabilised amid relatively high real interest rates, undervalued currencies and stable to improving commodity prices. This positive combination of factors should offer the EMD asset class a better balance against any potential headwinds.
“The market has more confidence in the outlook given the improvements in global growth as compared to the disruptive period around the so-called ‘taper tantrum’ when the US/EM growth rates were converging in opposite directions. If US data continue to be somewhat mixed then it could further extend the goldilocks period in which policy remains expansionary with little impulse. This will give the Fed the opportunity to begin reducing the size of its balance sheet, which we expect to complement our policy of rate tightening expectations without disrupting our overall positive outlook.”
NN IP anticipated China’s growth momentum will remain robust. The latest indicators, including PMIs, trade and monetary data suggest growth momentum has continued into 2017. Marco Ruijer added: “We believe that a relatively accommodative policy stance, especially on the fiscal side, is still required to stabilize the economy, which would still be a key anchor for emerging markets as a whole. The government is likely to show a strong resolve to maintain a steady exchange rate this year by using reserves, regulating capital outflows and opening up the domestic market.”