The tightening of global liquidity will pose increasing problems for investors in hard currency emerging market debt, meaning they would be wise to rethink credit exposure now.
In an outlook commentary, Guezour said the tightening of global monetary conditions is the toughest challenge facing EMD investors.
‘This global liquidity environment is particularly challenging for EM hard currency debt. We remain of the view that this sector exhibits an unappealing mixture of expensive valuations, heavy positioning by market participants and increasing illiquidity.
‘Therefore, investors with a particular focus on capital preservation should reassess their exposures to EM credit markets, as these have been one of the biggest recipients of the gigantic “carry trade” created by the ultra-lax monetary policies of recent years.’
Conversely, Guezour said selected local currency markets do offer value. ‘We believe that high-yielding local government bonds in countries which have recently undergone macro-economic adjustments could generate a strong return in US dollar terms in 2018 from a combination of yield, bond price gains and currency appreciation.’
Guezour will now focus primarily on Argentina, Brazil, Mexico, Russia, South Africa, India and Indonesia – countries with relatively high levels of yield and improving external accounts, and which are gradually removing aggressive monetary tightening policies.