The asset manager’s co-head, Gorky Urquieta, said significant headwinds in EMs over the past six months have affected the near-term appeal of the asset, but long-term outlook is still positive.
“In the near term, our outlook for EMD is cautious – we believe the asset class has hit an inflection point of market adjustments to the potential ‘beginning of the end’ of ultra-easy global monetary conditions,” Mr Urquieta said.
“However, despite recent ‘noise’ to the contrary, emerging market economies are generally expected to improve and remain stronger than developing market counterparts.
“In general, we believe that, recently, investors have made too much of slowing growth in emerging markets and we expect some economic resurgence, supported by global recovery which should partially offset China’s slowdown, even as EM policymakers gradually scale back monetary support.”
Mr Urquieta said current steady economic improvement could provide a positive backdrop for EM debt in comparison with other types of fixed income.
He added that EM debt would continue to benefit from long-term inflows, with investors looking to boost exposure to the structurally underrepresented EM market in their portfolios.
“With the global fixed income universe continuing to see near-historic low yields, the appeal of taking an opportunistic, global approach to bond investing in order to broaden potential sources of yield and total return is being reinforced,” Mr Urquieta said.
“Within this context, we believe the structural case for EMD remains strong, as investors increasingly recognise the economic significance, improved credit quality, and depth of emerging market economies, and accordingly make up for prevailing low allocations to EMD,” he said.
Mr Urquieta expects growth in EM Asia to pick up to 6.5 per cent this financial year and 6.7 per cent in 2014, with advanced Asian economies catching up the ASEAN 4 through continued recovery in exports to the United States.
China’s growth and Japan’s program to reflate the economy will both be beneficial for the region, he said.
“EM in the Middle East and Africa remain a concern,” Mr Urquieta added. “Growth in the Middle East is likely to soften due to flattening crude oil production by the Gulf Cooperation Council member states.
“Similarly, in Africa, growth should remain flat at 4.1 per cent this financial year as post-Arab spring challenge and weak commodity prices hold back many economies.
“However, in the longer term, growth should then accelerate to 4.9 per cent.”
