What now for emerging markets?

14th April 2017

What now for emerging markets?

Global economic indicators, by and large, continue pointing towards an acceleration of global economic dynamics in 2017. The improvement has been broad based, with the US continuing to lead the global business cycle. While the continued improvement in economic activity in the US increases the risks of additional monetary tightening, the overall yield levels are likely to be anchored by persistently and substantially lower yields in other major developed markets (i.e. Eurozone and Japan).

The prospects of fiscal spending under the new Trump administration in the US may face obstacles in the congress, and will likely be diluted to reduce its impact. Despite recent uptick, inflation should stay benign in most of the developed world (esp. Eurozone and Japan). Importantly, economic growth in emerging market economies has stabilized 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.

There are a number of countries that look attractive, driven by multiple themes, and assessed via their fundamentals, market dynamics and valuations metrics. For example, Argentina has made progress on important reforms (capital controls/ trade restriction etc.) under President Macri, economic activity is on (upward) rebound, monetary policy has switched to an inflation targeting one, country has access to more capital via inclusion in the EM Local Bonds index, and among LatAm, it has the least exposure to US (via exports). Yet, it still offers a relatively attractive yield – all in all, still a relatively attractive investment opportunity despite the outperformance in the past couple of years.

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