With progressed policy frameworks, more resilient fiscal accounts and less dependence on foreign funding, coupled with most of developed market yields at rock bottom levels, emerging market local currency bonds offer an attractive alternative for income-seeking investors.
Emerging markets - a diversified opportunity set
Why local currency emerging market debt?
We continue to believe that global growth will accelerate over the course of 2021, despite early year fears over the new COVID-19 variant strains and resulting lockdown measures. As the cyclical upswing takes hold, we believe that both emerging markets local rates and currencies will be supported. Thus far, the recovery has been facilitated by the V-shaped upswing in both industrial production and goods demand. This trend is likely to continue in light of ongoing infrastructure stimulus expenditure in China and the United States. Crucially, we believe that the nascent economic rebound is likely to be augmented by a concurring upswing in services as vaccinations gather pace over this year.
2. Declining core-market opportunity
With roughly $17 trillion of government debt offering negative yields (chart 2.1), the declining opportunity set in core fixed income markets will push investors to look further afield for opportunities.
As a result, investors are highly likely to explore the farthest reaches of emerging markets, with local currency debt offering a material yield pickup in a world of falling yields (chart 2.2).
A higher reward means higher risk, but ongoing global monetary and fiscal policy support is likely to broadly underpin opportunities within emerging markets.
That said, all opportunities are not made equal; careful analysis is required to uncover sound investments in emerging markets.
Focus is required to navigate the unequal recoveries from the pandemic, the differing monetary policy capacity remaining within central banks and the country specific outcomes.
EM currencies exhibit high volatility, which necessitates active currency management - because understanding the sources of volatility is crucial to sorting winners from weak performers.
Our analysis indicates that many EM currencies remain undervalued.
We believe that enhanced and coordinated global stimulus will be required for a protracted period, to support the early stage economic recovery, combat muted inflation pressure and to keep borrowing affordable for governments. In the face of ever-increasing policy extremes and the declining opportunity set in “core” markets, we anticipate further participation in EMFX, which has broadly lagged the recovery in high-beta assets.
Local expertise with a global perspective
The right investment manager
Our team apply a holistic approach in terms of experience and know-how, which combines their diversity of thought, varying individual backgrounds and expertise. To understand the diverse emerging market universe, we put together our collective expertise from different perspectives: fixed income, FX, DM, and EM credit. While being benchmark-aware, our investment professionals reserve the flexibility to invest beyond the benchmark to enhance potential returns and minimise risk over the medium to long term.
Macro research is at the heart of our company culture and investment process. By taking a research-led active management approach, we can add incremental value in a risk and cost-aware manner. Our process blends this top-down global macro perspective with a tactical, bottom-up approach that selects better risk-reward portfolio constituents within the universe that fits our global macro themes.
Team experience: Percentage of time spend living or working in region
Sources: Eurizon SLJ Capital Ltd, as of 01/02/2021
We believe that our research-led active management approach offers the best opportunity to exploit inefficiencies inherent within emerging, currency and fixed income markets with the potential to add incremental value in a risk-aware manner.
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