"The recent spike in the volatility of emerging market debt has rattled investor confidence in the asset class. After a promising start to 2013, valuations of EM US dollar-denominated sovereign and corporate debt have hit the proverbial wall on increasing market concern that the US Federal Reserve may begin to “taper” or slow the pace of quantitative easing measures in effect since 2009.
Many are now wondering whether a normalization of US monetary policy might produce a repeat of 1994, when emerging economies and the EM asset class collapsed following the Fed’s decision to tighten.
We believe such concerns are overblown when comparing the aggregate balance of payments strength of EM today versus the 1990s, but there is no doubt that the volatility of the asset class – whether a function of external or domestic factors or both – is poised to rise going forward, heralding a return of the “absolute return” or “opportunistic” nature of the asset class."
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