Global lockdowns have powered ‘stay at home’ technology stocks but bond investors need to look much further afield for the chance of compelling returns.
With roughly $17 trillion of government debt offering negative yields*, 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 both local and hard currency debt offering a material yield pickup in a world of falling yields.
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 under a Biden Presidency.
Some nations offer a self-help narrative, while others may be beneficiaries of shifts in global geo-politics, particularly linked to the incoming US President Joe Biden.
On the former, Egypt neatly encapsulates encouraging underlying fundamentals and the policy capacity to insulate the recovery from the pandemic.
After an exodus from Egyptian government debt at the start of the coronavirus pandemic, foreign investors began returning in their droves in the summer.
Overseas funds pulled more than half of their money from the local debt market earlier in the year but began to invest again in June and July to help reverse the record-breaking outflow that began in March.
The inflows have continued, which has helped to push yields down further. Investors have been buoyed by Egypt’s response to the pandemic; the MPC expects GDP to remain in expansionary territory at +3.6% FY 2019/20.
Further, the Egyptian growth outlook continues to be underpinned by the IMF Stand-by Arrangement (SBA) announced in June, sized at $5.2bn; a glowing review of the program in November stated “the Egyptian economy has performed better than expected despite the pandemic. Containment measures, supported by the authorities’ effective crisis management, and strong implementation of their policy program helped mitigate the effects of the crisis”.
Inflows have also been fostered by ongoing intervention by Egypt’s central bank. Since the onset of the crisis, the interest rate has been cut by 4%, with the latest 50bp reduction coming in November, with the door left open for more.
Elsewhere, we believe a Biden Presidency could see a range of country specific implications.
We expect President Biden will be positive for countries such as India and Mexico, while negative for Israel and Turkey.
India is likely to be a key strategic focus for Mr. Biden as the United States looks for alliances to temper the increasing influence of China.
India is actively pursuing a free trade agreement with the United States, and there’s a strong likelihood President Biden will want this to be an easy, and early, success of his term in office.
Closer to home, we believe that Mexico is uniquely positioned to benefit as supply chain reliance is transitioned away from China.
We believe that the signing of the US Mexico Canada Trade Agreement (USMCA) in July positions Mexico as the “China of the Americas”.
As with any investment, it is important to consider structural as well as cyclical forces.
We rely partly on both proprietary and academic research to help us identify long run shifts in structural mega trends, which will influence economies and financial markets.
But we also look at near term, forward-looking indicators, to map out the cyclical trajectory for emerging market economies.
Looking forward, we believe the global growth outlook for 2021 is on a solid footing. Growth has rebounded sharply from the depths of the COVID crisis, facilitated by the V-shaped upswing in both industrial production and goods demand.
With the discovery of a vaccine, we believe that the nascent economic is likely to be augmented by a concurring upswing in services as we move into 2021; that said, we do expect developed markets to lead the way, with emerging economies far more sensitive to challenges around supply and distribution of the new vaccines.
At the same time, we believe that enhanced and coordinated 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.
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*Source: Bloomberg and Eurizon SLJ Capital as at 19th October 2020
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