Trends in Emerging Markets Debt

Prudential #News Release:

26 May 2015

Trends in Emerging Markets Debt

In her latest outlook, Cathy Hepworth, senior portfolio manager and sovereign strategist at Prudential Fixed Income, believes four overriding themes will influence emerging markets debt in the coming quarters: 

•  The ongoing adjustment of emerging markets currencies;
•  Subdued economic growth in emerging markets, with structural rebalancing in several major countries such as China, Brazil and Russia;
•  The likelihood that investors’ global search for yield combined with supportive developed country central bank policies may offset potential headwinds once the U.S. Federal Reserve begins to raise interest rates; and
•  Idiosyncratic stories that warrant continued monitoring, namely in Brazil, Russia, Argentina and Venezuela.

According to Hepworth, current emerging market yield and spread curve levels remain attractive, but the key is to be selective.

“There could be opportunities in select currencies that have sold off significantly or that we believe are fundamentally undervalued, such as the Mexican peso, and there could be positive surprises in growth in select Central and Eastern European countries as well as in some Asian countries such as the Philippines, where we see solid fundamentals,” says Hepworth.

She also notes that even though the Federal Reserve’s interest rate decisions can weigh heavily on emerging markets debt, returns for the asset class have been generally positive during prior Fed rate hiking cycles. In the current environment, Hepworth believes there are attractive opportunities in short-maturity, higher yielding sovereign and corporate issues. This would include countries such as Argentina and one- to two-year corporate debt in Brazil. Also, some local bond curves have priced in rate hikes that may not materialize; the local Mbono curve in Mexico offers attractive value.

Want more information? Watch Cathy speak about these and other emerging markets debt opportunities, as well as a first-quarter recap and possible headwinds in 2015. Want to talk Cathy? Contact Theresa Miller.