10 Juli 2018, 13:59 GMT
If you were to ask Alexa, your virtual assistant, which Emerging Market Debt (EMD) asset class offers the best risk / return prospects, what would she say right now? Should you invest in external credit markets, looking for spread convergence through improving sovereign and corporate balance sheets? Or should you delve into the world of local currency debt, taking EMFX and local duration risk while speculating on the outlook for monetary policy and inflation?
Looking back over the period since the financial crisis, the yield on the EM local benchmark has almost always been above its sovereign and corporate external debt equivalents, averaging +0.75% of additional carry. Yet the picture on an annualised US Dollar total return basis over the same period points to a substantially superior outcome for sovereign (+9.5%) and corporate (+9.2%) external debt versus local markets (+6.7%). Adjusting for volatility and the equivalent risk-free rate, the Sharpe ratio on sovereign (+2.0) and corporate debt (+3.3) has been even more impressive when compared to local markets (+0.7), further enhancing the investor experience.
The story so far in 2018 illustrates the nuances of the three markets. EM sovereign external debt has lost -2.2% in total return YTD as this high duration asset class has suffered heavily from rising US Treasury yields. Conversely, local markets have returned +4.5%, with the persistently weak US Dollar providing the main tailwind. The shorter duration EM Corporate market meanwhile, sits in between with -1.3% total return.
Where do we go from here?
Overall, we are cautious, seeing limited opportunity for external sovereign spread compression at this late stage in the credit cycle while also mindful of growing fiscal risks. For us, the best sovereign value lies in high yielding but improving single B-rated countries like Argentina, Ecuador, Angola and Ivory Coast. We also prefer corporate debt to sovereign credit particularly in specific sectors such as Brazilian protein, Ukrainian metals & mining, African telecoms and Argentinian utilities.
On the local market side, the outlook is equally challenging. In our view, the US Dollar is overdue a rebound as the FOMC (Federal Open Market Committee) continues to respond to US economic health with tighter monetary policy and a reduction of its balance sheet. In local duration, we see the best value in inflation-linked bonds as price pressures grow across EM, driven by closing output gaps, rising energy prices and the fading benefit of benign base effects from the past two years. Attractive opportunities also exist at the front-end of frontier local markets like Nigeria and Egypt, with generous nominal yields and stable FX regimes.
Despite our cautiousness around global central bank liquidity withdrawal, we believe EMD still offers good relative value compared to the wider Global fixed income universe. EMD remains structurally under owned considering EM’s contribution to global growth, while EM’s external balances have vastly improved in recent years and the real yield cushion on local markets is considerable when compared to DM peers.
Against this complex backdrop, we believe Alexa’s response should be to recommend gaining a balanced exposure, with flexibility to switch between the different EMD asset classes. Moving away from traditional benchmark indices towards a total return approach can also help to capture alpha, while minimising the drawdowns typically experienced by the benchmarks.
Lesen Sie mehr
The value of investments and the income from them can go down as well as up so you may get back less than you invest. Past performance is not a reliable indicator of future results. These materials are provided for information purposes only and are intended only for the person or entity to which it is sent.
These materials do not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation of any offer to buy or sell any securities or investment product. Fidelity makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries or by all investors or counterparties.
Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. They are valid only as the of the date indicated and are subject to change without notice.
This material was created by Fidelity International. It must not be reproduced or circulated to any other party without prior permission of Fidelity.
This communication is not directed at, and must not be acted on by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. Fidelity is not authorised to manage or distribute investment funds or products in, or to provide investment management or advisory services to persons resident in, mainland China. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisers.
This content may contain materials from third-parties which are supplied by companies that are not affiliated with any Fidelity entity (Third-Party Content). Fidelity has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content.
Fidelity International refers to the group of companies which form the global investment management organisation that provides products and services in designated jurisdictions outside of North America Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on products and services and does not provide investment advice personal recommendations based on individual circumstances.