- Emerging markets debt is expected to perform well in Q2 given attractive valuations and the improved outlook for global economic growth.
- Many EM central banks have more room to maneuver given that the U.S. Federal Reserve’s future rate hikes are largely priced into the yield curve.
- EM local currency bonds may 'catch-up’ with the recent strength in EMFX. With positive inflows and supportive technicals, EM local rates are expected to outperform.
- Both EM hard and local currency debt offer value on a name-by-name basis.
Through March 2017, top-performing sovereign EM debt issuers were primarily lower-rated credits that posted double-digit returns, such as idiosyncratic Belize (+61.32% on restructuring), Mongolia (+12.68% on an IMF program), Iraq (+8.21%), Dominican Republic (+7.74%), select African commodity names that were up between 6-7%, and Brazil (+6.22%). Even Turkey was up (+5.31%) on supportive technicals and valuation, despite a deteriorating policy backdrop and a credit rating downgrade.
In addition, the credit rating outlooks for Russia and Argentina were upgraded to positive and, for Brazil, to stable. EM corporates were mixed during the quarter, although many credits performed well. Relative to EM sovereigns and quasi-sovereigns, however, we believe EM corporates appear to be fully valued.
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