EM Debt in the COVID era

The fast view

• Emerging market (EM) fundamentals are solid, overall. They are well placed not only to weather the global crisis, but to maintain faster growth than developed markets (DMs) through the COVID era and beyond.
• Predictions of doom for EM fail to appreciate how the asset class has come of age in recent years. Monetary policies are credible, inflation is subdued, and debts are significantly lower than in DMs and appear sustainable.
• Global trade fears are often overblown. Deglobalisation, to the extent it is actually happening, is less of a threat to EM than many realise, given increasing regionalisation and rising consumption across the developing world.
• The EM universe is diverse, and the COVID era is widening the gaps between the strongest and weakest nations. A selective investment approach and active management will be key to tap the opportunity.
• We think this is an attractive entry point for the asset class. We expect EM debt to continue to offer a valuable yield pick-up versus debt in DM, and we believe valuations look attractive in both local and hard currency debt. But, again, selectivity will be key.

The pandemic has sparked some doom-laden predictions about EM economies. To assess their ability to weather the COVID-19 storm, we take a deep dive into EM fundamentals from a fixed income investor’s perspective.

Although the coronavirus struck at the end of a challenging decade – with the developing world buffeted by China’s slowdown, a reversal in capital flows and political headwinds in some key markets – EM entered the COVID crisis in resilient shape.

Consequently, we believe this global crisis will have a negligible longer run impact for most EMs. In fact, as the world emerges from the COVID recession, we think these markets will be well positioned to benefit from the recovery in a low-yielding world.

However, the gaps between the strongest emerging nations and the weakest is widening. While we expect EM overall to outperform developed nations, investors will need to take a careful and selective approach to building an EM debt portfolio.

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