Should EMD investors switch to 'fight' or 'flight' mode?

Re-escalation of trade war tensions could feed end-of-cycle concerns

Periods of market volatility can cause investors to question their commitment to certain asset classes, especially those they perceive as tactical plays best reserved for 'risk-on' environments.

Last year, tighter financial conditions, a stronger US dollar, increased trade tensions and slower global growth dampened investor enthusiasm for emerging market debt (EMD). From the second quarter of 2018 through the end of the year, retail-oriented EMD strategies lost assets — not in copious quantities, but at least modestly — while institutional participants generally held firm. Flows followed performance, as emerging market debt, especially the bonds of countries with greater external vulnerabilities, produced disappointing returns for the year. That demand dynamic dramatically rever...