Asian emerging markets credit

Inflation remains low, so emerging markets can focus on using policy to boost growth – as India just has.

 

We continue to favor Emerging Market and Asian bonds within the fixed income space. It is likely that emerging market spreads will remain tight and even tighten further, while higher interest rates induce a gentle rise in developed markets sovereign debt. We currently expect US 10-year yields to move up to 2.6% by June 2018, from current levels of around 2.3%.

 

After a disappointing few years, where emerging markets growth was dragged down by various factors, we expect slightly stronger emerging markets growth in 2017, compared to 2016.

 

“Our views on this issue are similar to that of the IMF, which expects a modest recovery in several Asian economies.”

Inflation remains low, so emerging markets can focus on using policy measures to boost GDP growth. A case in point is India. Inflation eased to 1.54% YoY in June, even lower than the record low of 2.18% in May. This was 50bps below the lower band of the Reserve Bank of India (RBI) 2-6% inflation target band. Food prices were down 2.1% compared to a year ago, after a 1.05% fall in May. Core inflation (excluding food, fuel and transport) came in at 4.2% YoY.  Low inflation allowed the RBI to cut rates earlier this week.

 

While emerging market spreads are below their historical average, they are still over 100bps above the lows recorded in 2005-2007 prior to the Great Recession in 2008-2009.

 

As interest rates remain high in emerging markets compared to developed markets, we expect emerging market returns to outperform other major fixed income asset classes over the next 12 months.

 

Source:  Bloomberg Finance L P, Deutsche Bank AG. Data as of Aug 2, 2017.

Markus Müller
Global Head
CIO Office
Source: CIO Bulletin, Aug 4, 2017