The trade balance of emerging markets is encouraging to look for opportunities among its fixed income assets

  • The trade balance of emerging countries has registered a strong correction that has allowed it to return to positive territory. 
  • The moderate stance of the world’s leading central banks could continue to favor emerging debt markets.
  • GAM, PIMCO and Amundi share their analysis of emerging market fixed income.

By Funds Society, Madrid

In 2018, an issue that affected emerging market debt was the unbalanced nature of growth: outside the United States there was growth, but it was rather insubstantial in Europe. This was due in part to a concatenation of extraordinary factors: the new regulations on pollution knocked out the automobile industry, the reduced flow of the Rhine River made a dent in the manufacturing processes and the protests of the yellow vests in France caused great disruption, as well like the tortuous Brexit process.

According to GAM , its outlook for 2019 is for global growth to be more balanced (even if it is lower), in which China and the strength of the dollar will play a very important role in assessing the opportunities that emerging fixed income can offer. “The balance of payments is a key catalyst for emerging currencies, while bonds denominated in local currencies have a strong positive correlation with currencies. The exchange rate is a great driver of inflation. When a currency depreciates, inflation increases, interest rates rise, and bonds offer low returns. In this sense, the trade balance of emerging countries is encouraging, “they say from GAM.

After worsening during much of last year, during which the emerging currencies were left behind, the trade balance of emerging countries has registered a strong correction that has allowed it to return to positive territory. In historical terms, this is a good indicator of profitability. During the first decade of the century, when the emerging ones enjoyed commercial surpluses, the profitability of the asset class was healthy. By the end of 2008, emerging markets were overheated, since they imported much more than they exported, and the result was a disastrous year for the asset class. The recovery after the global financial crisis was followed by a new deterioration in 2013, which reached its peak with the “taper tantrum”. The asset class experienced very positive years in 2016 and 2017 and,

“The recent recovery has been caused by non-Asian economies, as they are less vulnerable to rising oil prices. Now that the price of oil has fallen, we may begin to see an improvement in Asian trade balances, especially if China recovers. It is encouraging that there are not many markets whose external scales present a fragile aspect “, they added from GAM.

Equally optimistic are shown from Amundi, as the manager believes that although the momentum of emerging markets has deteriorated recently, the moderate stance of the world’s leading central banks could continue to favor emerging debt markets. “We continue to be constructive with respect to the strong currency debt of emerging markets, for an attractive holding, while margin compression is limited, and we tend to favor those countries with cheap or qualified ratings for inclusion in indices. In emerging market bonds in local currency, we expect returns with an extra carry from high yield countries, such as Brazil, South Africa and Indonesia. We continue to be positive in this asset class, focusing on tailor-made selection as the risks persist, “says Amundi’s latest analysis.

In the view of Francesc Balcells and Brian Holmes, emerging market portfolio managers at PIMCO , the proliferation of last resort lenders is favorable for emerging market issuers, but over time, the credit quality of the rating segment more low of the asset class seems that it will decrease.

“We believe that the growing uncertainty surrounding the payment of debt and the higher expected losses due to defaults emphasize the importance of active management in the selection of individual emerging market loans and, therefore, protect large sudden losses. As investors, we are not completely moving away from the emerging hard currency segment with great risk, but we look for opportunities in loans with stronger balance sheets and where any commitment to the external balance is a bridge to more solid fundamentals “, explain these two PIMCO managers.