At a well-attended investment bank research conference on emerging markets last week, a noteworthy chart on show displayed returns across various asset classes over the year to date. In this chart, six of the top ten asset classes were from EM.
Well out in front of the pack, at +27.9%, was EM equities. EM local markets in USD terms returned 14.0%, and our principal indices, EM sovereigns and EM corporates, both in hard currency, returned 9.3% and 7.4%, respectively. The latter was just outside the top ten.
These numbers trumped developed market indices: US HY has returned 6.9%, and US IG 5.3%. In Europe, the numbers were 5.5% and 1.2%.
It’s fair to say that at the start of the year, many people didn’t see such strong performance in emerging markets coming. The pending Trump presidency cast a shadow over EM, and caution was widespread.
Fortune, however, favoured the brave. Since that time, growth across emerging markets has surprised to the upside, led by China, while the Trump presidency has proven to be strong on tweeting, and less strong on delivery. The dollar has lagged.
We think that this is not just a phase, and that emerging markets are poised for continued performance. Some emerging economies were badly burnt by the commodity sell-off, but came back more resilient – growth is now picking up across EM; valuations are superior to those in developed markets, where post-crisis interference has smothered yields; finally, inflows to the asset class provide a renewed and supportive technical.
As ever, the picture is far from perfect: South Africa looks like it will get worse before it gets better; Venezuela is teetering on the edge. However, the overall picture is undoubtedly a constructive one, and against this backdrop, we see widespread opportunities across the emerging market debt space.
The market continues to fear that the strength is about to turn over. We think the greater risk to investor positioning is that it persists.