NN IP sees options for EMD in two global scenarios for growth

Jonathan Boyd
NN IP sees options for EMD in two global scenarios for growth

On the balance of global economic growth either remaining bound within a range going forward versus rising past the 3.5% level, which has been an effective ‘ceiling’ for the past six years, NN Investment Partners head of Emerging Market Debt Marcelo Assalin has said that either of the two scenarios offers opportunity for investors in the asset class.

A rangebound growth scenario would work, because “global liquidity and financial conditions would remain very supportive on the back of central banks’gradual move towards policy tightening,” Assalin said.

“Capital inflows would likely persist, helping EMD spreads to tighten further. EMD offers higher yields generally and tends to perform extremely well over the longer term in both hard currency and local currency strategies. In a rangebound economy it means further spread compression for hard currency assets. Especially, in the higher yielding part of the universe, the so-called frontier markets.”

“Local currency debt deserves a particularly closer look: emerging market currencies are still undervalued by about 15%, according to our estimations, despite appreciating this year. Investors could see their returns enhanced as emerging market currencies are recovering just some of the ground they have lost over the last five years.”

In a scenario of faster global growth, meaning above 3.5% on an annualised basis, would also benefit EMD as an asset class, as it suggests rising global trade. This flows through to EM in areas such as commodities exports. Frontier markets would also benefit in such a scenario, constituting “the next generation of emerging markets” including “low correlation with other assert classes, relatively low duration and high yields.”

Overall, EMD benefits from countries’ stronger balance sheets than was the case in 2013, when the so-called taper tantrum in markets hit EM-related assets.

“This makes them less dependent on external financing and less vulnerable to external shocks. This should provide a strong cushion in an environment of globally-rising interest rates and a potentially stronger dollar,” Assalin added.