Emerging Markets Debt

Direct from the Investment Desk – what a potential slowdown in global growth means for Emerging Markets Debt investors

Paolo Valle, CFA, Senior Portfolio Manager, Emerging Markets Debt

Global growth is once again hitting the headlines and many investors are questioning what impact a potential slowdown may have on their portfolios. With attention again focused on emerging markets and what an era of slow growth means for them, Emerging Markets Debt expert, Paolo Valle, talks about why he believes investors shouldn’t panic and why structural economic reform could be the key to unlocking return in EM regions’ debt markets.

Behind the short term headlines lies a strong structural story

Roberto Sanchez-Dahl, Senior Portfolio Manager, Emerging Markets Debt
Paolo Valle, Senior Portfolio Manager, Emerging Markets Debt

Despite the ‘taper tantrum’, the underlying investment case for emerging markets debt remains simple yet powerful: attractive yields relative to U.S. treasuries coupled with a strong and improving credit story, which is backed by superior economic growth rates and structural demographic trends.

Introduction – short term volatility distracting from long term fundamentals of this asset class?

Amidst the ‘noise’ of short-term news flow, it would be easy for potential investors in global emerging markets debt to become distracted from the asset class’ still-powerful fundamental story. In the past year to eighteen months, those short-term distractions have increased in both size and number. In particular:

  • Talk of the slowdown of the Federal Reserve’s quantitative easing stimulus prompted a widespread and well-documented sell-off across emerging markets – the so-called ‘taper tantrum’.
  • The Chinese authorities’ attempts to rebalance their economy away from exports and towards more sustainable domestic consumer demand are impacting a number of emerging economies, raising concerns about China’s ability to maintain the economic growth required to sustain not only its domestic dynamics but also its role as a key driver of global growth. However, these measures are clearly positive for emerging markets in the long term as the Chinese consumer is expected to be a huge potential importer of goods/services from emerging economies.
  • The volatile situation in Ukraine, political unrest in Turkey, Egypt and elsewhere, combined with an unusually large number of elections have seen geo-political risks return to center stage.

Idiosyncratic as these developments are, in aggregate they have led to a widening of emerging markets spreads relative to U.S. treasuries and a change in investors’ sentiment towards the asset class. But has the fundamental case for investors in emerging markets debt really changed? Manulife Asset Management’s Emerging Markets Debt experts, Roberto Sanchez-Dahl and Paolo Valle, assess the structural changes occurring in these markets.

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