Video - EM Outlook 2017
Emerging Markets Debt: What's in store for 2017?
We are looking at low positive returns from Emerging Markets this year.
Yerlan Syzdykov, Head of Emerging Markets - Bond & High Yield, gives his view of what lies ahead for Emerging Market Debt, including the likely impact of the US election, China's growth perspectives and the outlook for EM currencies.
Real Growth, Real Yield, Real Opportunity?
The U.S. presidential election result shocked the prevalent Emerging Markets (EM) consensus, sharply drawing down markets across a variety of emerging asset classes, as investors sought security in cash. However, by mid-December we saw improving risk appetite. Compared with the 2013 ‘Taper Tantrum’, the pickup in risk appetite came quicker, reflecting, in our view the anticipation of an acceleration in U.S. earnings’ growth.
Looking ahead, we expect to see improving U.S. demand, rising commodity prices, and better domestic growth outlooks with lower default rates, which all tend to reflect in EM rallies. In our view, U.S. economic performance is likely to be an important driver of end demand in the emerging world in 2017.
In terms of risk, we see China could be a potential issue in the second half of the year, as it faces an implicit policy dilemma around its currency and the banking system. A further source of risk may come from the policy debate in the United States, as President Trump’s cabinet is materially different in character to his predecessor’s more mainstream group and outcomes associated with policy errors (inflation, negative growth, famine, disease, that sort of thing) may potentially become less uncommon.
Emerging Markets Debt, an Underinvested Story
In our view, Emerging Markets are drawing attention for these reasons:
- Total debt in developed markets close to 400% of GDP … for EM it’s only around 50%
- EM Sovereign bonds rally following the ECB’s plans to buy bonds
- Yields are strong in EM … currently 5.8% for sovereigns and 6.9% for High Yield
- A softer U.S. dollar can be positive for EM
- EM growth may have slowed, but it remains positive