Last year was just a 'blip' for emerging market bonds, says Dehn


‘We expect stronger than average returns in emerging markets fixed income in 2019 due to the pullback in 2018,’ he said.

Dehn also expects better performance over the medium-term as quantitative easing (QE) – which he described as the ‘most distorting event ever’ – is unwound.

He said that central banks buying $15 trillion of bonds – or 15% of all the bonds ‘on planet earth’ – did not have the result investors thought it would.

As central banks in the major developed economies hoovered up their debt, driving down the yield, it was assumed this would drive investors into higher yielding emerging market debt.

Instead, investors were happy to resist the allure of these yields, even pulling money out of emerging market bonds, given the outsized capital gains available from both developed market stocks and bonds. 

But this era has now ended, said Dehn, with central banks now in tightening mode and the sugar rush of tax cuts in the US dissipating.

‘We are in a different phase – it does not mean the market will collapse but it will grow at much more modest rates; 5% to 6% in line with normal markets,’ he said.

Against that backdrop, Dehn (pictured) argued that ‘emerging market bond markets offer an extremely attractive value proposition’.

‘Our base case scenario envisages returns in dollar terms ranging from 30% in investment grade credit to 60% in local bonds over the 2019-2023 period,’ he said.

‘There is serious distortion in global bond yields… and it will take five years to unwind them,’ he added.

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‘The International Monetary Fund has downgraded global growth – they think developed markets are going to slow every year for five years but emerging markets are going to be flat.’

Dehn said the lack of global growth over coming years means ‘politicians will get scared’ and this will impact ultimately on emerging market bonds, but investors should resist the urge to ditch these bonds when times get tough and instead buy more.

‘They will do stupid things… we have already had the abandonment of free trade and Brexit,’ he said. ‘Every time developed markets do something stupid, investors will have the irresistible urge to sell emerging market bonds.’

Emerging market equities are also set for a rebound this year, according to Ashmore portfolio manager Edward Evans. He said the market was looking ‘fairly resilient’ after struggling post-financial crisis and following the rerating in valuation, emerging market equities were ‘trading at 11 to 11.5 times [earnings], which is quite reasonable’.

In particular, he believes the materials sector will be a winner this year as the Chinese economy stabilises following a slowdown that worried global markets.

‘Look at the winner if the Chinese economy is robust and it manages its deceleration – materials,’ he said. ‘Materials  has already been through supply side reform… and the performance will be even better if you throw in some stimulus [from the Chinese government].’

However, Evans does not believe that the Chinese economy will accelerate at the rapid rate it has in the past despite the government planning more fiscal stimulus once again.

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‘Do we think China is doing a 2015 and throwing whatever it takes [at the slowdown] and building a super-cycle? We do not because China’s response [to the slowdown] has been very managed…it is not on the cusp of a super-cycle but normalisation.’



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