Most investors have shunned the riskier developing economies, but emerging market corporate debt and related exchange traded funds could turn around this year.
“It’s quite bold, it’s quite risky, but I think this is the way we are going,” Sergio Trigo Paz, head of EM fixed income at BlackRock, told the Financial Times, predicting EM local credit markets will deliver double-digit returns for 2016.
Currency trends have previously weighed on emerging market assets on central bank actions as the U.S. dollar strengthened. However, Trigo Paz now argues that the Federal Reserve has turned dovish, the European Central Bank has no more fire left in it and the Bank of Japan is “doing QE without the QE,” which could cause further dollar retracement.
Consequently, with lessening foreign exchange risks, Trigo Paz believes investors can pocket an average 7% returns on emerging local credit over developed market credit, instead of seeing returns eaten up by currency depreciation, which takes potential earnings into double digits.
Additionally, risk associated with falling commodity prices, notably uncertainty over oil prices, could diminish ahead as global oil producers work to prop up prices.
Trigo Paz also pointed out that BlackRock favors countries that have been improving their trade balances, including Brazil, Turkey, Russia, South Africa, Indonesia and Chile.