In the wake of the Brexit result, flows into riskier assets have increased as investors search for assets that are not subject to very poor liquidity and are offering some yield. EM debt in particular has continued to benefit from record inflows.
In EM, our allocation is very much influenced by our ‘Mind the Gaps’ theme, which recognises the increasing heterogeneity of economic and sovereign debt prospects (across and within regions) in a challenging global growth environment.
Consequently we feel long-duration exposure in countries characterised by sensible policy making/structural reforms and solid fundamentals – such as low debt levels and improving external positions looks attractive. In our view, some of these still offer relatively attractive spreads and capital appreciation prospects (e.g. Colombia and Indonesia). However, at the front-end stable credits/positive growth stories (such as Morocco and Vietnam) can be complemented by selective imminent USD obligations in lower rated and high-yielding countries. We view these as benefiting from stable adequate reserves and/or IMF programme support (e.g. Belarus and Ghana).