Emerging Local Markets | Outlook interview

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  • 07 mins 46 secs
Is now a good time to be investing in EM Local? What risks and opportunities present themselves in this market? What are the key drivers in performance over the next 6-12 months? T. Rowe Price's portfolio manager joins us to discuss.


T. Rowe Price - Institutional


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We believe it’s an interesting time to be looking at emerging market local currency debt at the current juncture. First and foremost valuations are quite attractive. We’ve seen obviously a significant drop in developed market yields over the last few years, and particularly in the last few months; in fact 20%, over 20% of the global aggregate index, i.e. high quality bonds, is negative yielding; over US$14 trillion negative yielding debt globally. In emerging market local currency debt universe yields are still notably positive, in some cases significantly so, and real yields are attractive. So we think valuations from a bond perspective are much more attractive than developed markets at the current juncture. So that is something that is interesting to clients and potential clients. In addition to which currency valuations are relatively cheap. So you’re looking at an asset class which pays a decent yield and is relatively cheap from a valuation perspective.

So both FX and bonds look relatively attractive from a medium-term perspective, and certainly relative to developed market opportunities. In terms of positioning, emerging market debt flows have been relatively quiet this year. A lot of the activity over the last year, 18 months, has been focused in core yields and developed market high quality credit bonds, which have seen significant inflows from retail investors. In contrast emerging market local currency debt funds have seen limited sponsorship. So we think positioning is pretty light, particularly given the relative yield differentials between developed market and emerging markets. So those two perspective, both positioning and valuations, we think makes sense to be looking at the asset class again.

When it comes to fundamentals it’s obviously significantly uncertain at the moment, given concerns about global growth and trade frictions globally. These are two considerations one has to take into account when you’re looking at emerging markets, given growth globally and trade tensions are big drivers for risk appetite; however,, going forward over time, we think the fundamentals, from a political perspective, from a fiscal, from an inflationary perspective and ultimately from a growth perspective, are quite supportive to emerging markets. Now these are investments one needs to make over the medium to long term. But we think periods of episodic weakness makes sense for investors to be looking to add out of developed market debt.

One of the biggest current risks for emerging markets is the nature of the global growth backdrop, which is obviously very concerning. There are notable growing fears about slowing global growth, and for emerging markets this is the key life blood for capital flows into the asset class. So this is a major concern at the moment. But we feel that central banks in particular and governments to a lesser extent are in the response phase, which should hopefully underpin global growth over the medium to long term. So that’s the major risk for us is the growth side. From a fundamental perspective we think emerging markets look in relatively good shape. Inflation is moribund, emerging markets are cutting interest rates where they can to support growth, the fiscal balances are in relatively decent health, and the external positions which were a significant barrier to performance four or five years ago have notable improved. So we think the fundamentals are in relatively good shape in emerging markets. But in near term growth is a key focal point.

In terms of opportunities, the asset class is relatively cheap. So yields in the emerging market local currency space are ranged between 5 to 6% at the index level. That compares very favourably with developed market yields, which have obviously dropped precipitously over the six to 12 months. In addition to which we think currency opportunities are notable now. Valuations are pretty attractive. And although currency tends to drive the volatility of the asset class, particularly over shorter-term time horizons, so it makes for needing to have a diversified approach, we think the overall opportunity set is starting to look more attractive. When think about specific markets, I think it’s important to remember that currency volatility is a big driver of overall performance, particularly over the six to 12-month time horizon historically. Normally currency drives around 50% to 60% of the return volatility over that period.

So a diversified approach in trying to pick opportunities which seem attractive makes sense. A number of currency markets look attractive to us. Those that have decent fundamentals and look attractive to international investors; notably in that regard the Russian rouble, we think portions of Central and Eastern Europe, and a number of Asian currencies, India, Indonesia, look attractive in this instance. On the bond side in a world where yields are extremely low, either zero in nominal terms, or notable negative in real terms, there are a lot of decent opportunities within emerging markets for generating real positive yields. Over time we think opportunities are attractive in Indonesia, in India, in Russia, and also in a number of frontier markets. For example Egypt and also Serbia, the latter of which we’ve invested in for over five years. In a world where yields have become suppressed by concerns about global growth and central bank monetary policy easing and quantitative easing, we think increasingly investors will continue to look towards emerging markets to generate diversification and yield.

In terms of the key drivers of performance over the next six to 12 months, yields globally have fallen quite a lot. So this has historically been a big driver of performance, but over the next six to 12 months the opportunity set for significant capital appreciation seems lower. Yields have fallen over 100 basis points at the index level, so the capacity to fall much more aggressively from that sort of level is lower. We think the opportunity set probably pushes more towards the currency side over the next six to 12 months, given valuations are particularly attractive. And on the other side of the equation the dollar is pushing up against historically expensive levels. The Federal Reserve is moving into an easing cycle, and the political cycle is re-establishing itself once again in the US with elections next year. So in terms of the opportunity set for the next six to 12 months, whilst relative valuations still look attractive versus developed markets, arguably significant returns are probably going to be more tilted towards the currency side of the equation rather than the bond side of the equation.

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T. Rowe Price

T. Rowe Price is a global independent investment management firm, managing over Euro 989 billion across a range of strategies in equity, fixed income and multi-asset in order to provide investment solutions for clients.

Our investment approach is solidly rooted in teamwork, fundamental research and taking a long-term perspective, while at the same time carefully managing risk.

We established our London office in 1979 via the joint venture, Rowe Price Fleming International, and in 2000 began operating in the UK and Ireland as T. Rowe Price International. Today we have over 400 employees based in London and operate in 16 countries worldwide.

As of 30th June 2019

Important Information

For professional clients only. This material is not intended for use by retail clients.

Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested. Issued and approved by T. Rowe Price (Luxembourg) Management S.àr.l. 35 Boulevard du Prince Henri L-1724 Luxembourg which is authorised and regulated by the Luxembourg Commission de Surveillance du Secteur Financier.

T. ROWE PRICE, INVEST WITH CONFIDENCE and the Bighorn Sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc. All rights reserved.