Fixed Income

EMD Relative weekly notes: Week Ending January 11, 2019

Week Ending January 11, 2019


James Barrineau

James Barrineau

Head of Emerging Markets Debt Relative

Investing is always about probabilities and gauging uncertain outcomes given limited information. There are a small number of instances over the course of any person's investing life when probabilities are very highly skewed in the investor's favor for attractive return prospects.

For emerging market debt, we feel this is one of those times.

Figure 1 shows why by the numbers. With inflation probabilities muted and EMD yields at elevated levels, we are at a point far towards a right-hand tail of "real" yields over the past 10 years—meaning investors have the opportunity to invest in yields above the market's expected inflation rate that have very rarely occured in the past 10 years.

Source: Bloomberg, as of January 9, 2019. Yields for the JPMorgan EMBI Global Diversified Index minus the 5-year US treasury forward breakeven rates. Past performance is not a guarantee of future results. Actual results would vary.

The drivers behind those numbers reinforce the message: the Fed is clearly at or very near the end of the hiking cycle and the US dollar has responded by falling--the single most positive indicator any EM investor can hope for. With US growth clearly slowing, the impetus for that direction to continue seems strong.

Lastly, dollar debt in EMD has never had two consecutive negative years. We believe locking in EMD yields at current levels is an extremely attractive proposition.

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.