The outlook for emerging markets has improved. After a long period of uncertainty, which was mainly driven by the US-China trade dispute, we expect economic indicators to continue to improve.
2018 was a particularly tumultuous year, as major elections and sanctions affected emerging-market credit. Although the unexpected election result in Argentina is yet to be fully understood, this year should be a quieter one – indeed, the US elections should be the most notable ones for emerging markets.
Conscious of the Q4 2018 market meltdown, many investors positioned themselves lightly at the end of last year. But after a major drawdown was avoided, asset allocators started to review the landscape and credit markets have experienced strong inflows this year so far.
Emerging-market credit looks particularly attractive in the current environment, and strong demand has resulted in it outperforming the rest of the credit market (see figure 1).
Figure 1. Emerging-market credit offers superior relative value
Source: Hermes Credit, as at January 2020.
Developed markets still suffer from a large share of bonds trading above call, limiting upside capture, which makes emerging markets – with their low proportion of callable bonds – a more attractive proposition. And the large share of negative-yielding assets, along with Europe’s Corporate Sector Purchase Programme, supports demand for markets outside of the European Union.
Lack of supply in emerging markets should also support valuations. This stands in contrast to developed markets, where there has been record issuance – particularly in high-yield energy. In this environment, it is more important than ever to scan the length and breadth of the global spectrum for opportunities – a topic we covered in our insights piece on a flexible approach to credit allocation.