Summary
THE ESSENTIAL
The recent dovishness from the Fed, a benign inflation environment and the easing in global financial conditions continue to support a goldilocks environment for Emerging Markets (EM) assets. On the risks side, trade disputes appear to be softening as we approach the US presidential campaign. But the existing tariffs are weighing on the corporate earnings, with mixed prospects across regions as some countries are also benefitting from a restructuring of the global supply chain.
Against this backdrop EM bonds continue to be an attractive space for investors in search for yield. We still see better risk-reward in EM sovereigns, EM local rates (duration component) and corporate credit compared to EM FX, on which we are defensive, especially in low yielding, equity sensitive currencies in Asia (more exposed to trade and China growth).
On the equity side, Emerging Markets benefitted from the trade war truce announced at the G20 as well as more dovish EM Central Banks following the Fed and the ECB lead. Looking ahead we expect the outlook across regions to remain mixed. We look for areas of good fundamentals, interesting dividend yield and improving governance standards and for less vulnerable countries with stories of resilient domestic growth and progress in structural reforms.
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