Schroders: Emerging market debt (absolute return) in 2017

Abdallah Guezour, head of emerging market debt absolute return at Schroders looks at the outlook for emerging market debt (absolute return).

Schroders: Emerging market debt (absolute return) in 2017

In the challenging bond environment of 2017, selected local currency government bonds could offer the best opportunities to generate attractive returns. These are best accessed using a risk-controlled absolute return approach.

The bad news

We believe that the conditions are in place for the US Federal Reserve to accelerate its process of monetary policy normalisation, thus exacerbating the recent pressures on bond markets both in emerging markets (EM) and globally.

Meanwhile, China’s deteriorating growth trajectory and skyrocketing debt ratios are likely to remain a major source of concern. Within this context, there is still a high risk that episodes of uncontained capital outflows from China could trigger intermittent dislocations in global financial markets.

The good news

The good news is that a number of EM countries have become better equipped to face these challenges thanks to the macroeconomic adjustments implemented over the course of the last three years.

These adjustments are now well-advanced in countries such as Brazil, Colombia, Russia, India, Indonesia and South Africa. These countries have already experienced large currency devaluations, a completed tightening cycle and a renewed focus on reforms. As a result, the inflationary pressures and the large current account deficits that these countries suffered from during the period 2013 to 2015 are now under control.

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