The 'reflation' sensation: Emerging markets poised to benefit from vaccine rollout and sustained global recovery

Macro scenarios set to work in sector's favour

In the first part of the year, the vaccine rollout is supporting a robust economic recovery and global central banks continue to operate very loose monetary policy.

This scenario favours the emerging markets (EM) asset class, which is relatively well placed to benefit from the global 'reflation' trade. We are, however, mindful of the impact of higher US Treasury yields (and especially a rapid rise) on EM fixed income, especially some of the higher quality parts of EM. This is because the credit spread in this EM sector is insufficient to absorb the total return drag implied by a sell-off of US Treasuries. Today, higher yielding EM is better placed to navigate these challenges, although even in this asset class it is important to differentiate ...