Should Investors Allocate to EMD in 2017?

January 27, 2017

Recent events have strengthened the case for Emerging Markets Debt (EMD). Our chart of the week shows how yields for local and hard currency strategies are above their historical averages and are an attractive opportunity as we begin 2017.

The European Central Bank extended stimulus by nine months, albeit at €60 billion per month instead of the original €80 billion per month. Trump’s trade policy proposal is largely isolated to China, and his immigration policy may have a positive effect on Mexico given that its consumer pool and labor force may grow as a result. Lastly, the price of oil is on the rise with the recent OPEC deal, which is a positive for EM oil exporters. All of these facts support an allocation to EMD.

If Trump’s infrastructure policy is enacted we would expect commodity prices to rise, which would be a tailwind for EM commodity exporters. If Trump’s trade policy is adopted, it should be a headwind for EM manufacturers. But overall, EMD fundamentals are attractive. Current accounts of EM countries are stronger and leverage is still low relative to developed market countries. Spreads are at wide levels and yields are high, which provide a cushion for any downside. In total, EMD offers diversification, yield, and upside potential and should contribute to positive returns for investors in 2017.