The technical picture in hard currency (HC) emerging market debt (EMD) has a strong positive bias, according to according to NN Investment Partners. The specialist investment house sees substantial year-to-date inflows and limited net issuance in the near term.
NN IP says it continues to see the green shoots of more stable fundamentals in EMs, partially helped by stable commodity prices, especially oil but also industrial metals. In some countries even improving, it observes.
In particular, the fundamentals of corporate debt have been improving and NN IP points to an encouraging upturn in the upgrade/downgrade ratio. Valuations still offer value compared to other corporate credit asset classes, it believes.
First quarter positive
- The first quarter of 2017 was a positive one for the asset class
- Strong performances were recorded across the board
- Both HC and local currency (LC) strategies enjoyed continued inflows
- NN IP expects this 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 (pictured below), said leading indicators point to a modest acceleration of global economic dynamics. The combination of growth and benign inflation should not be disruptive for fixed income in the near term.
Economic growth stabilised
Importantly, economic growth in EM economies has stabilised amid relatively high real interest rates, undervalued currencies and stable to improving commodity prices, he believes. This should offer the asset class a better balance against 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, he adds.
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, he goes on.