Emerging Market Debt
December 2024
- Cyclical drivers could be favourable and US growth remains robust
- EM currencies are cheap on historical measures
- We favour a cautious investment stance, ready to deploy should asset prices become more attractive
1. What do you think could be the biggest challenge or opportunity for clients in 2025?
At the outset, 2025 looks like being a challenging year for our asset class, and the main issue with this question is identifying which challenge is biggest. China’s economy has been the motor for the commodity exports that drive many emerging markets (EMs), and it seems clear that 2024’s stagnation has not been enough to trigger the sort of aggressive policy response which has lifted the economy in the past. The Trump administration in the US is set on derailing the decades-long drive to globalise that has been a driver of EM progress. The Trump administration also clearly feels it has license to explore unorthodox policies largely shunned by large economies since the Second World War. The European economy remains moribund, and Europe is the only credible driver for global growth that does not produce a stronger US dollar – an environment in which EM currencies invariably struggle. The Trump election in particular has made investors cautious about EM, and flows into the asset class slowed in Q4 2024.
On the positive side, cyclical drivers are, if not positive, at least not obviously negative. Growth in the US remains robust and reasonably balanced, though has been dependent on loose fiscal policy without recent precedent. The post-Covid inflationary surge does look to have been transitory. Bond markets are pricing very substantial rate cuts – larger than the expected cuts at the start of previous cutting cycles, but these do not look outlandish.
In summary, the biggest challenge for clients appears to be keeping faith with a group of countries that – dollar-denominated debt aside – have often disappointed in recent years, in the absence of an obvious catalyst for a rally. The biggest opportunity is that, with the exception of China, most of these challenges are prospective and may not actually happen, and in the meantime, valuations look attractive.
2. What do you see as the one major investment opportunity for you in 2025 and how can you capitalise on it?
The biggest opportunity is that in EM local currency debt, valuations look extremely attractive. Currencies are cheap on historical measures or when looking at the balance of payments in almost all individual countries. Meanwhile, inflation has come down faster in EM than in developed markets (DM), and aggressive central bank actions in EM have left yields high in both nominal and real terms.
3. What is the biggest risk to your asset class next year and how can you mitigate that risk, or even turn it into an advantage?
The biggest risk we foresee is that actions by the new Trump administration are at the aggressive end of current expectations. While we believe that anti-globalisation and protectionist efforts are mostly priced into EM assets, actions on the macroeconomic side are not. Attempting to end Fed independence or dramatic loosening of an already-loose fiscal stance, in particular, look like a serious risk to the US bond market and hence to the term premium globally. A poorly handled effort could effectively offset Fed policy rate efforts and leave a highly leveraged global economy facing higher yields. In the face of this, we favour a cautious investment stance with a reserve to deploy should asset prices become more attractive.
Paul McNamara is the lead manager for Emerging Market Bond strategies at GAM Investments.
Important disclosures and information
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio nor represent any recommendations by the portfolio managers nor a guarantee that objectives will be realized.
This material contains forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is no indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. Reference to a security is not a recommendation to buy or sell that security. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio nor represent any recommendations by the portfolio managers nor a guarantee that objectives will be realized.
This material contains forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.