Seeking out good alpha opportunities in emerging market debt

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There are reasons to expect a slower and less comprehensive vaccine roll-out among EMs than in richer countries, and the fiscal damage done to already-fragile sovereign balance sheets may increase vulnerabilities. But the steady recovery of the asset class since Q2 has been every bit as remarkable as the initial blow-out in spreads back in March. Much of the higher-rated EM universe now trades at spreads over US Treasuries roughly equivalent to those prevailing at the start of the year. With valuations in EM sovereigns around long-run averages – and with balance sheet risks now more pronounced – we are cautious about the potential for significant further spread tightening in hard-currency fixed income. But total return opportunities in the year ahead remain attractive, especially when accompanied by judicious credit selection. So far this year EMD performance has still to fully catch up with other parts of the fixed income asset class.