EM Debt Outlook Remains Favourable Despite China Slowdown

May, 2017

Recent reforms and fiscal adjustments in several key countries, including Argentina, Brazil and India, support the outlook for Emerging Market Debt, according to NN Investment Partners.

NN IP’s EM Fiscal Momentum Indicator has fallen to -0.29 (compared to +0.57 end of March).  A negative reading implies governments are tightening fiscal policy and securing more tax revenue. The Indicator ranges between +/-3 and gauges the policies of 21 main EMs.

Maarten Jan Bakkum, Senior Emerging Markets Strategist,  NN IP, commented: “As long as – on balance – EM fiscal data continue to improve, investors are likely to look through the deterioration in some specific cases such as Turkey and South Africa.”

NN IP has reduced exposure to EM local currency bonds slightly because it expects markets will take a negative view of an anticipated economic slowdown in China and weakening commodity prices this year. However, longer term, it believes that as long as economic growth momentum in EMs stays in the 4.5%-5.0% range seen over the last three years and inflation continues the downward trend from 5% to 3% seen in the last five years, the environment for EM debt will remain good.

NN IP also believes the risk of a negative shock from a sudden change towards a higher pace of interest rate hikes by the Fed look low. Maarten-Jan added: “Perhaps markets have not priced in enough hikes for the coming years, but the recent economic data, policy expectations and Fed language do not suggest that market expectations are unrealistic. Also, EM capital flows have so far proven to be more resilient in an environment of rising US interest rates than most people thought a few years ago.”