There has been a big improvement in emerging markets which I don’t think investors are fully aware of. Their external imbalances have improved significantly. Their current account deficits have shrunk. Foreign direct investment, in the meantime, has been very robust.
Therefore these countries are much less reliant today on portfolio flows than they were a few years ago, particularly during Taper Tantrum.
So over the last several years, emerging-market hard-currency debt has significantly diversified, as many more companies from different countries and industries have been able to issue in the market.
This has allowed investors to get access to more countries—and many of them being stable countries—and also allow[ed] a lot of investors who were traditionally not able to buy emerging-market assets to access high-quality and high-rated instruments.
I think what investors have to be paying attention to is where the fundamentals are actually improving, where the political outlook is changing, and where we are expecting to see a deleveraging within the corporate sector and within the countries that we are investing in. Not every country is going into a positive political climate, and therefore it’s very important to differentiate between the countries that are and the ones that you should be avoiding.
Even though growth is stabilized in many emerging markets, inflation has remained fairly benign, even at a time when it’s been picking up in developed markets. This has been accompanied with real rate differentials in emerging markets, relative to developed markets being at historical highs. And this is particularly attractive for local markets in these countries, and it has the prospect of attracting flows into emerging-market local markets, which we have already started to see pick up this year.
Many other investors get spooked by the headlines, and they react to them, whereas, as an institution, we are focused on fundamentals. We do our homework and we actually identify value opportunities that emerge in situations like that.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.