In the latest instalment of the Schroders 2017 Investment Outlook Series the investment firm examines the outlook for emerging market debt (absolute return). The Schroders' EMD team comments that in the challenging bond environment of 2017, selected local currency government bonds could offer the best opportunities to generate attractive returns. These are best accessed using a risk-controlled absolute return approach.
“Meanwhile, China’s deteriorating growth trajectory and skyrocketing debt ratios are likely to remain a major source of concern. Within this context, there is still a high risk that episodes of uncontained capital outflows from China could trigger intermittent dislocations in global financial markets.
“The good news is that a number of EM countries have become better equipped to face these challenges thanks to the macroeconomic adjustments implemented over the course of the last three years.
These adjustments are now well advanced in countries such as Brazil, Colombia, Russia, India, Indonesia and South Africa, he adds. These countries have already experienced large currency devaluations, a completed tightening cycle and a renewed focus on reforms. As a result, the inflationary pressures and the large current account deficits that these countries suffered from during the period 2013 to 2015 are now under control. In Indonesia, the trade deficit has been eliminated and inflation dropped to multi-year lows.
He identifies Brazil as another example of post-crisis improvement, and the country now appears to be out of the danger zone judging by the recent amelioration in the “country risk score”. This scoring of various vulnerability indicators is based on the quantitative analysis framework developed by the EMD Absolute Return Team.