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Inflation favourable for emerging market debt

inflation emerging markets

The high inflationary economic environment being experienced across the world has made emerging market fixed income investments more attractive.

Emerging markets are proving an attractive sector for fixed income portfolio allocations as a result of the high levels of inflation currently pervading all world economies and their proven ability to manage similar situations, a global fund manager has observed.

“In terms of the extraordinary environment that we’re in, something uncommon that’s happened is emerging market countries’ central banks have raised interest rates well ahead of developed markets. It’s normally the opposite,” Payden & Rygel director and portfolio manager Eric Souders noted.

“This time is different. Why? Because countries in emerging markets understand what inflation does to their economies, they understand what it does to their currencies, their growth, their ability to fund themselves externally.

“And so they’ve gotten ahead of it, we think, in a very pragmatic way in this particular environment, well ahead of developed markets, and as a result we actually like emerging market debt now and we think that certain parts of it should play a role in a multi-asset fixed income portfolio.”

According to Souders, investors still need to be very discerning as to the particular emerging market fixed income instruments they are willing to hold in their portfolios.

“For us it means a focus on BB-rated hard currency, sovereign countries where we see an improving trajectory and real rates are elevated, external funding needs are contained and again that country is in a position to actually ease with respect to monetary policy now relative to developed markets that are going in the other direction,” he noted.

To this end, he identified the specific emerging markets Payden & Rygel currently favours.

“We like Mexico, for example, and we think in the deep deglobalisation environment … Mexico’s proximity to the US will bode well,” he said.

“We like Brazil as well. We think that political risk in Brazil has declined somewhat and stabilised. Also Brazil is an exporter of commodities and we think, in the deglobalisation environment, there will be more demand for commodities as countries are bringing production back on shore.

“Brazil also has elevated real yields so we think it is in a good position to be able to cut interest rates over the near to medium-term timeframe and actually stimulate their economy.”

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