Signs of divergent growth in emerging market economies BlueBay Asset Management says the emerging market (EM) economies are now on diverging growth trajectories, creating opportunities in EM corporate debt (EMD).
Polina Kurdyavko, partner and senior portfolio manager at BlueBay, said that valuations have corrected in recent months and are now attractive. She added: “The traditional emerging market growth model has changed. Easy growth driven by rising prices of commodity exports to supply China’s low-cost production and its domestic capacity build out is no longer applicable. Many countries need to adjust their policies to drive domestic growth and address imbalances.”
Kurdyavko added that there is now greater differentiation between emerging markets and growing distinctions between those with current account and fiscal deficits and those with surpluses. Some commodity-exporting countries saw their currencies appreciate and let government spending grow, but productivity and efficiency did not improve. This had led to deficits when commodity demand fell and less flexible and competitive economies. She added that emerging market corporate fundamentals have remained strong, but risks remain.
On Federal Reserve tapering, Kurdyavko said: “In our view, the Fed will likely remain accommodative in the near term, which is supportive for fixed income generally and particularly for spread products such as emerging market corporates. Slower growth in emerging markets is already being felt, and in large part is the cause of the recent underperformance of emerging market sovereign and corporate spreads.”
Looking at different countries, Mexico has undertaken economic reforms and its medium-term growth profile is improving, while countries such as India and Indonesia need to address reform priorities. “In an environment of gradually-rising US rates, and based on our default projections which suggest some compression in emerging market corporate spreads, we would expect a positive return within the asset class over the next twelve months.”