While the global low interest environment is likely to support strong returns in EMD over 2020, the rise of political risks in countries like Argentina and Lebanon means that investors need to be careful.
“Investors in Argentina are facing what could be a lengthy debt restructuring process following the election of Alberto Fernández in October, and are awaiting clarity on the main objectives of the restructuring, as well as the details of his wider economic programme and its implications for debt sustainability,” Aviva Investors wrote in their House View 2020 report.
“A debt restructuring is also likely in Lebanon which is a highly indebted country and is facing escalating protests and social issues given chronic economic pressures.”
The last time EMD investors saw such major restructures was in Ukraine in 2014-15, according to the report, when the country restructured $18 billion in foreign debt in the middle of a recession partially induced by its ongoing civil war.
Investors should also be paying attention to key votes in Ivory Coast and Ghana, where economic policy has been reasonably supportive in recent years.
“It will be crucial to monitor the situation in each country as the political weather can change quickly,” the report reads.
While global growth is set to stabilise through 2020, EMD remains an attractive opportunity for investors still grappling with low interest rates in developed economies.
“Greater confidence in the growth picture together with a stable or lower US dollar should unlock attractive total returns and allow investors to embrace those valuation opportunities within the asset class with greater conviction,” the report reads.
“But at this stage, the focus should be on markets that have strength in underlying fundamentals such as Brazil, Russia and Ukraine, or by exploring the growing opportunity set in local currency frontier markets.”
