EM Outlook: Is The Time Right For Investors?
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Text on screen: Pramol Dhawan, Head of Emerging Markets Portfolio Management
Dhawan: This year has been the worst outflow episode in the history of emerging markets debt, and as a result, valuations look historically cheap. So is now the right time to jump into EM?
FULL PAGE GRAPHIC: TITLE – EM outlook through the three lens approach: The graphics shows three circles that from left to right read: Valuations: Attractive, Technicals: Challenged, Fundamentals: Sound
We look at EM investment through three lenses: valuations, technicals, and fundamentals. From the valuation side, they look undeniably attractive.
EM has suffered disproportionately through tightening of financial conditions and hiking of interest rates globally.
So from a valuation side, when we compare it and contrast it to U.S. corporate credit, we think emerging markets looks attractive indeed. But from a technical perspective, we have to look to see when the worst of the financial conditions tightening is behind us. At that point, we think EM may be poised to rally.
But it’s also at that point where the fundamentals can become more important. We want to try and bifurcate between the winners and the losers within the asset class at that point in time, because those country specific risks can manifest very quickly and very unexpectedly.
Text on screen: Wait for clarity before pivoting to an outright bullish stance
Images on screen: Emerging market countries, shipping
So in summary, we prefer to be cautious and wait for more clarity before pivoting towards a more outright bullish stance.
We expect the growth in emerging market assets to continue, as the number of countries and companies issuing debt is set to increase. Local markets in particular are where we have seen the strongest growth, which we see as a positive sign, as they generally offer higher diversification benefits and can also immunize the issuer from the stresses that come from a stronger dollar and higher U.S. rates environment.
Text on screen: TITLE – Two areas we’re watching: BULLETS – Development of corporate issuance in local currency, Less liquid private credit issuance
Two areas that we are watching carefully are the development of corporate issuance in local currency and less liquid private credit issuance. Local corporates do not formally have a benchmark as of yet and consequently are not widely allocated to, but the area is growing fast.
Less liquid EM credit offers investors the ability to harvest higher yields and liquidity premiums that are still quite rare, at least relative to the U.S. and the European Union, where private credit industries have matured over the past decade.
Text on screen: TITLE – Key takeaways for EM investors: BULLETS – EM should form a structural part of your portfolio, EM can provide both yield and diversification benefits, Tread carefully in the asset class – especially in higher yielding names, Need for active risk management in EM
The main takeaways for investors are that EM should form a structural part of your asset allocation decision. It’s too big an opportunity set to ignore and to think of from a tactical perspective. And in fact, it’s one of those rare opportunities that offers both yield and diversification benefits.
We think investors should tread carefully in the asset class, especially in those higher yielding names, but not to avoid that part of the asset class completely. There will be invariably winners and losers in this asset class, and I think that that underscores the need for active risk management and analysis.
Text on screen: For more insights and information, visit pimco.com
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Past performance is not a guarantee or a reliable indicator of future results.
Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Private credit involves an investment in non-publically traded securities which may be subject to illiquidity risk. Portfolios that invest in private credit may be leveraged and may engage in speculative investment practices that increase the risk of investment loss. Diversification does not ensure against loss.
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