Emerging Markets Corporate Debt
Improving fundamentals: We believe EM corporate debt will continue to benefit from an increasingly stable macroeconomic environment and a gradual pickup in growth. In addition, the capex adjustments and cost reductions that we saw throughout 2016 are now translating into improvements in credit fundamentals. In this environment, we believe credit selection will dominate returns.
Attractive valuation per unit of risk: Historically, EM corporate debt has shown low sensitivity to U.S. rates, and the asset class also tends to have lower duration. Despite the fact that the U.S. may be on track to increase rates, global developed market yields remain low relative to recent years. In our view, EM corporates currently offer attractive yields with less duration risk than many of their developed market peers. Within the EM corporate space, we prefer shorter-duration strategies that we believe will offer superior carry and roll-down per unit of duration and volatility risk.
There are several macroeconomic factors that we believe will continue to be supportive of EM corporate debt, including GDP growth in Asia and Latin America, an improving economic
and political atmosphere in Brazil and stabilizing foreign exchange and energy prices.
EM corporate fundamentals are improving and will likely continue to benefit from an increasingly stable macroeconomic environment.
Technicals remain favorable and over the next year, we do not expect to see sharp reversals in fund flows. Net financing is expected to stay subdued as a result of continued liability management among EM corporates. Also supportive of the asset class, cash flows from amortizations and coupons are expected to remain robust in the coming years.
Going into 2017, selectivity and active management are critical. In our view, a disciplined, bottom-up approach to credit selection is paramount to seeking the most attractive risk-reward opportunities in the growing EM corporate asset class.