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If the tariffs between the US and China have indeed peaked, there should be further positive spill-over for EM exports, business confidence and growth in the months ahead. This climate argues for increasing exposure to EM hard-currency bonds in our view, as we see flows attracted by decent levels of yields in comparison to developed markets. We also see good opportunities in EM local bond markets, especially in currencies. This echoes our broader view on the dollar and the likely supportive capital inflows to EM. Being selective is going to be key in both hard and local currency bonds, as last year demonstrated the importance of domestic political risks and policy shifts. In currencies, for example, there are some that we will be careful to avoid despite the nominal yields (e.g. the Turkish lira) and others we will be happy to be long – those where yields dovetail with helpful economic fundamentals (e.g. the Russian rouble).
We will of course be monitoring political risks, especially in Latin America, but arguably even there the peak level of uncertainty has passed. Global rates and US Treasuries will continue to be an important bellwether for our markets, but on the assumption that US yields are in a range, we see room for some EM hard currency yield compression, particularly in sovereign sub-investment grade.
Peter Kinsella
Global Head of Forex Strategy
Koon Chow
Emerging Markets Macro and FX strategist
Thomas Christiansen
Senior Portfolio Manager
Head of EM Sovereign Debt