3 reasons the case for emerging markets is strong
- The Federal Reserve is on pause. Monetary policy divergence between the U.S. and the rest of the world was one of the main reasons why the U.S. dollar strengthened in 2018, creating a negative impact on international currencies. Unless the inflation picture changes significantly over the next few months—and we don’t believe it will—the possibility of multiple rate hikes is highly unlikely. This shift in monetary policy is a strong positive for non-dollar assets, including emerging-market (EM) fixed income.
- Trade worries have decelerated. U.S. trade tensions with China have been a major headwind for all international fixed income assets over the past year. Along with major disruptions to global supply and distribution chains, it’s becoming clear that both countries recognize the damaging and potentially lasting effects of an extended trade war on their own economies. Our view is that a resolution of these tensions is the more likely outcome, resulting in a positive effect on global growth and global assets.
- Most geopolitical concerns have been priced in. Of the many idiosyncratic risks that stressed the market last year—such as the Nafta renegotiation, elections in Latin America, Turkish politics and even Brexit—most are already heavily discounted by the market, if not on the path to resolution. A risk that is already discounted is less of a risk and more of an opportunity.
As always, volatility remains a key consideration—the daily headlines underscore that reality. But our view is that the myriad risks that clouded EM fixed income in 2018 have been well vetted by the markets. For 2019, those bouts of volatility can serve as attractive entry points for investors.