In financial markets, inconsistencies and contrasts are part of the game, they constitute the normality of an eccentric environment that feeds on uncertainties and expectations. Today the contrast is in the apparent indifference of the markets towards the turbulences in global politics and the reason for this decoupling is in the ancient and well-known fact that the markets discount the future, investors look at the profits expected in twelve months or more. The feared shadow is not the war but its consequences, inflation above all: the big bet is on the ability of central banks to contain the speed of the increase in prices without causing a recession. Carlo Benetti, Market Specialist at GAM, underlines this by observing that a second reason that explains the boldness of the price lists is their concentration: much of the performance was driven by the few large technology companies supported by enthusiasm for the prospects of growth in future profits thanks to artificial intelligence.
Three reasons to support emerging bonds
Lastly, markets have become accustomed to living with uncertainty. The shocks of recent years seem to have “mithridatised the markets”, like the mythological king of Pontus they remain insensitive to the poison of oil prices, war and global politics. Which remain important, but are no longer the center of attention which instead focuses on the risks of inflation and the asymmetries of growth. In the immediate future, enthusiasm for the upcoming new listings of technology companies continues to gain traction. The almost exclusive attention given to a few growth stories excludes what lies just outside the light cone. Far from the spotlight of the big Western stock markets, many emerging economies continue to benefit from demographic, industrial and technological transformations capable of supporting growth for years to come.
Emerging economies are the possible alternative in freeing portfolios from concentration in American stock markets. In this asset class, active selection is crucial, we must distinguish the countries that benefit from the energy shock from those that suffer its consequences, raw material exporters and importers, dollar debtors and countries with large foreign exchange reserves. Emerging markets today find themselves at a crossroads between economic resilience and compelling valuations.
The GAM view
There are three good arguments for emerging bonds. The first topic is real yield: in an environment where inflation squeezes the real yield of Treasuries, emerging bonds offer substantial yields: the central banks of Brazil and Mexico, for example, raised rates early and maintain real rate buffers that protect against imported inflation. The second is the global allocation which, in emerging debt, is low compared to the historical average. The active primary market in “high yield” and “investment grade” issues is an undoubted sign of good health. A third good reason for this asset class is the gradual convergence of credit quality between issues in developed markets and those of emerging countries, with the latter benefiting from reforms and progress made over time, while developed economies show an erosion in fiscal fundamentals.
In the current environment, the relative preference shifts towards hard currency debt. Local currency debt remains attractive for real yields, but is more exposed to dual exchange rate and rate pressure in a context in which the dollar has regained strength and its medium-term path remains uncertain. As regards emerging stocks, let’s start from an inconvenient truth for those anchored to American exceptionalism: the price lists of these countries trade at significantly lower multiples than the United States and, in many cases, the valuations do not reflect the expected growth differential.
and duties?
The geopolitical scenario of world trade adds a further element of evaluation: American duties have been reduced by the Supreme Court, a favorable picture is emerging for those countries that have a privileged position in global supply chains. Mexico, Vietnam, India are among the countries that benefit more than others from the “reshoring” phenomenon: in a world that is dividing (again!) into areas of influence, the “reshoring” it’s a capital allocation topic for the long term.
The history of emerging markets in recent decades, made up of crises, restructuring, reforms and restarts, teaches that the best entry points arise when consensus looks elsewhere. On the other hand, the downside is that emerging stocks have a high beta on the directionality of global risk sentiment. In phases marked by high volatility, emerging stock markets can move erratically, oscillating in ways that are difficult to plan. The lesson in this market phase is that perhaps the disorientation felt by investors is not necessarily a danger signal, it could be the symptom of a change in perspective.
