The trends set to drive EMD returns higher

Q2 2019 saw strong performances recorded on the main indices tracking emerging market debt (EMD), with nearly all of the risk factors across the EMD sovereign local currency, sovereign hard currency and corporate hard currency segments contributing positively to returns.

While valuations are not as cheap as they were before the Q2 rally, we see a number of favourable trends that support further upside potential for EMD ahead.  Foremost is the outlook for rates in the local currency EMD sector. In Q2, benchmark rates posted their best quarterly performance in three years. However, we expect a more accommodative policy stance from the US Federal Reserve and European Central Bank should provide a tailwind here. Should EMD investors switch to 'fight' or 'flight' mode? That easing bias has already underpinned a rally in risk assets which, when combin...