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Since May, global fixed income markets have experienced large sell-offs. The immediate trigger was a sharp increase in US Treasury yields as the Federal Reserve signalled a willingness to taper its quantitative easing programme. But the sell-off also coincided with growing concern over slower growth in emerging markets over the past 24 months, exacerbated, among others factors, by fears about widening current account deficits. This negative sentiment, we think, is overblown.
We believe EM fundamentals remain strong and their economies will benefit from a recovery in developed markets. We have seen very large adjustments in valuations and technical positions, creating interesting investment opportunities in EM debt. But differentiation across countries is critical in this environment.
Even though there has been a slowdown, EMs are still growing significantly faster than DMs including the US, the eurozone and Japan (see chart below). Better DM growth is bound to boost demand for EM exports.
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| Sources: IMF World Economic Outlook, Stone Harbor Investment Partners LP |
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