SINGAPORE: With the US Federal Reserve Board (Fed) keeping on hold any rate change and a slow and steady global growth recovery, the conditions look good for emerging market debt in 2020, says Merian Global Investors, a global asset management firm.
“It’s been a good year for emerging market debt, and macro-economic conditions look promising for next year,” said its Emerging Market Debt Portfolio manager, Delphine Arrighi, in a statement.
The emerging market debt index, the JP Morgan EMBI Global Diversified Index, rose 13% this year to the end of October, while the emerging market (EM) local currency index, the JP Morgan GBI EM Global Diversified Index, rose 11&, following a decline last year.
For much of 2019, Arrighi said, the market has been oscillating between fears of recession – a negative for risk assets and emerging markets in particular – and a more dovish Fed, with rate cuts being a positive for carry and therefore emerging market debt.
“Markets now appear to be positioning for some growth recovery, helped by signs of progress in US-China trade talks,” she said.
As for the end of a strong dollar, Merian Global Investors does not believe that the US will enter into a recession next year but is instead normalising to trend growth after the ‘sugar rush’ of 2018.
“The data in emerging markets, though not stellar, is showing some green shoots, indicating that central bank easing and fiscal stimulus has taken hold.
“As a result, emerging markets may grow faster than developed markets and the US in particular, signalling the end of the strong US dollar cycle,” said Arrighi.
Hence, she said, although the big move in rates seems largely done, the value next year should come from the long-awaited recovery in EM local currencies.
“We also see more upside in frontier markets next year, where the central banks have lagged the global easing cycle.
“The most value is in countries with high carry and high real rates as central banks will have room to cut rates.
“Egypt and Ukraine, for example, have performed well this year and have further to go, we believe,” she said.
As it is a right time for local currencies, Merian Global Investors sees similarities between current economic conditions and the cycle of 2016-2017, where slow stabilisation and transition in 2016, similar to this year, were followed by growth and recovery in 2017.
The year 2017 was a record year for inflows to the asset class, at around US$61 bil (RM250.7 bil), versus around US$30 bil so far this year.
“Investor flows have been increasing into hard currency EM debt, and the asset class is less cyclical than some may believe.
“With returns close to developed market equities and less volatility, we view it as a core holding in a well-diversified global portfolio,” said Arrighi.
“Given next year’s outlook, EM local currency debt could finally outperform hard currency.”
With the Fed on hold and green shoots showing global growth recovering slowly, Arrighi said: “We think EM debt will look even more compelling in 2020 and attract strong inflows.” – Dec 30, 2019 Bernama
