Emerging Markets spread carry continues
A cura di Luc d’Hooge, analista di Vontobel
In our previous fixed income Note-it we outlined our view that the fundamental deterioration in China is not as bad as the price action and the news flow suggests. In fact, as spreads are trading above 400 basis points at the wide end of the range of the last years, we continue to think that these are good entry levels.
However, some of our readers have raised another concern related to the asset class, it is to this concern that we turn our attention to today: How will emerging market (EM) hard-currency debt react to the first Federal Reserve hike in nearly a decade? If history is any guide, a hike will not have much of an effect.
Looking back at the last two hiking cycles (green line) in the late 90s and in mid-2000, we can see that there has been some spread widening (blue line) just ahead of the first hike (as we are seeing now), but then, spreads actually tightened. As a result, overall yields (red line) remained stable during the hiking cycle.
Will it be different this time? Clearly, we come from a very low base in the Fed fund rate, but at the same time, there is a strong reason to believe that the hiking path will be more gradual than the ones we have witnessed prior. Also, fundamentally and in terms of currency-reserves, many EM countries are in better shape than in the 80s, which is probably the period that is still on the mind of people that fear a shock from a Fed hike.
This does not mean that we won’t see periods of volatility going forward, yet we continue to believe that the great carry to be had in our asset class should be re-assuring to investors with a longer-term horizon.