Bonds, International Shares, Investments

Emerging market outlook strong

Emerging markets Shares Bonds Federal reserve

Emerging markets are likely to recover quickly, providing opportunities to invest in bonds and credit instruments as developed markets return to a more stable footing.

Emerging markets are likely to return to growth ahead of developed markets this year, creating prospects to invest in bonds in a diverse range of economies and regions outside the United States and Australia.

Payden & Rygel senior vice president and emerging country market analyst Ehsan Iraiparast said ongoing risks in terms of growth in the US market had created room for opportunities in emerging markets, which had come out of the most recent economic cycle in good shape.

“Emerging markets were very resilient through this global tightening liquidity cycle as they don’t rely on [US] dollar funding anymore. They fund themselves mostly locally so they’re resilient to that kind of liquidity,” Iraiparast said during a briefing in Sydney this week hosted by funds management firm GSFM.

“Emerging market central banks were very proactive in their rate tightening cycles. They hiked well ahead of the Federal Reserve and European Central Bank, which helped keep their economies in balance, and then the developed markets caught up to them.”

He said while the resilience of the US market has been noted, emerging markets, particularly Mexico, India and Indonesia, were also strong and many recorded good growth rates last year, leading to expectations they will fare even better in 2024.

“The growth slowdown that we might see could be more pronounced in developed markets than emerging markets and there is the possibility of growth in the latter outperforming developed market growth,” he said, noting a downward trend in inflation.

“In emerging markets the disinflation story is pretty entrenched. Inflation has come down back to central bank targets in many cases, which has allowed those banks to start easing policy. Emerging markets lead on the way up in terms of rate hikes, but are also leading the way down in terms of rate cuts.

“So looking at all this, we see key opportunities now in emerging markets in local interest rates. There’s room for yields to come down, but we think the risks are more symmetrical in that sector versus credit spreads, which have more room to widen in those local markets.

“One thing that’s interesting about emerging market debt is that we have a really wide geographical distribution and we do see value in high-yield credit and sovereign and corporate [bonds], but remain mindful of the lowest rating tier of credit because refinancing risk can be high in this environment.”


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