According to a note by Nikko Asset Management senior portfolio manager Raphael Marechal, the growth of fixed income assets in emerging markets will be affected by the interplay of two factors: emerging market “growth dynamics” and the “pace” of interest rate hikes in the US.
“With the global economy forecast to deliver another year of above-potential growth, the gap between [emerging markets] and [developed markets] growth is again expected to widen,” the note said.
“A wider EM-DM growth differential should continue to support foreign direct investments (FDIs) and portfolio flows into the asset class.”
The “pace” of US rate hikes poses a risk to emerging market asset returns as it could expose emerging market vulnerabilities, the note said.
“Although we see the asset class as being generally much less susceptible to ‘tantrum’ concerns given the reduction of macro fragilities since 2013, there are still countries with weaknesses, and there will be times when we could see some consolidation taking place in certain local markets.”
But this year, emerging markets are forecast to perform “slightly higher” than last at just under 5 per cent, despite a slowdown in China, driven by domestic demand.
The note concluded: “As in 2017, strong inflows should continue to provide a backstop when risk aversion materialises, as substantial amounts of money remains waiting on the sideline, as investors hope for better entry levels.”
