Insight Article Desktop Banner
 
 
2021 Outlooks
  •  
January 04, 2021

Favourable Winds for Emerging Market Debt

Insight Video Mobile Banner
 
January 04, 2021

Favourable Winds for Emerging Market Debt


2021 Outlooks

Favourable Winds for Emerging Market Debt

Share Icon

January 04, 2021

 
 

Conditions for EMD outperformance in 2021 appear to be in place. First, a global backdrop of steady, extended monetary accommodation, prospects of a large-scale deployment of COVID-19 vaccines by 1H21, and, to a lesser extent, expectations of fiscal stimulus in the U.S., should boost the growth-sensitive segments of the asset class. Therefore, HY credit, EM FX and local currency high-yielders should outperform IG, which has less of a valuation cushion, and is vulnerable to potentially steepening DM yield curves in our opinion. Moreover, the next U.S. administration may alleviate trade tensions, thus widening EM-DM growth differentials, which are a key driver of portfolio flows into emerging markets. Furthermore, the consensus weak U.S. dollar view, if accurate, would further strengthen the case for investing in EM fixed income, though we note that a weaker dollar is not a necessary condition for EMD outperformance next year.

 
 

External Debt

In external debt, our fair-value sovereign spread model (Display 1) suggests that the most attractive opportunities are in HY sovereign/quasi-sovereign bonds.

Country-Specific External Debt Opportunities:

  • Overweight Egypt: Offers value on the back of strong commitment to reforms, ongoing cooperation with multilateral organisations, resilient activity indicators and high real yields.
  • Overweight Ukraine: Provided the government puts the IMF program back on track, following recent setbacks on key reform items.
  • Overweight Turkey: If the incipient shift toward more orthodox economic policies proves sustainable.
  • Underweight Sri Lanka: Despite cheap valuations, the recently released 2021 budget failed to dispel debt sustainability concerns.
 
 
 
Display 1: Fair Value Sovereign Model
 

Forecasts/estimates are based on current market conditions, subject to change, and may not necessarily come to pass. This is for illustrative purposes only and is not meant to depict the performance of a specific investment. Past performance is no guarantee of future results.

Source: Bloomberg, MSIM, November 2020.

 
 
Local Currency Debt

We believe opportunities in local rates can be found primarily in high yielders. These should outperform in scenarios of higher global growth via a reduction in risk premia, and their relatively high yields should help provide cushion in a DM yield curve steepening scenario.

Country-Specific Local Currency Debt Opportunities:

  • Overweight duration in Russia, South Africa (the steepest curve in EM) and Indonesia, and to a lesser extent in Mexico.
  • Brazil rates look attractive but we remain neutral for the time being, as we assess the government’s willingness properly to address its poor public debt dynamics.
  • Finally, we stay on the sidelines in low yielders such as Czech Republic and Thailand, on their vulnerability to improved global economic prospects next year.
     

EM Corporate Debt

Overweight Asia:

  • China: We remain comfortable with our overweight. We have taken advantage of the new issue market to add exposure to the new economy/ consumer sector and continue to favour the real estate sector. We are encouraged in the short term by the resilience of the larger companies, which have, with few exceptions, delivered meaningful earnings growth, and in the medium term from the rollout of the government’s Three Red Lines policy aimed at reducing leverage across the sector.
  • Elsewhere in Asia: The outlook remains relatively benign with our overweight positioning outside China remaining predominantly across Indian (utilities) and Indonesian credit.
     

Mixed Positioning within the Middle East:

  • The Middle East property sector remains challenging, although we believe the worst may already be over, with regional malls/hotels/offices reopening toward the end of the second quarter.
  • We are more constructive on the utilities and infrastructure sectors, while the outlook for consumer staples has improved.

Underweight EM Europe:

  • Our positions are driven more by individual credit views than macro-trends (particularly in countries such as Turkey).
  • In our view, geopolitical risks challenge the attractiveness of valuations for Russian corporates despite the strength of their credit fundamentals.
     

Idiosyncratic Opportunities in Latin America:

  • We favour Latin America nondiscretionary consumer and commodity sectors where demand appears to be stabilising and prices have settled into a more healthy range.
  •  Outside of idiosyncratic stories such as Argentina, which from a corporate perspective is not yet out of the woods, the outlook is fairly constructive.

 

Conclusion

We began this piece by stating the factors which we believe support the overall case for EM debt in 2021. In addition, technical factors enhance our optimistic outlook. We believe that an increasing EM-DM growth differential and a continued search for yield should drive inflows back into EM. There is ample room to recover on this front, particularly in local currency debt, which still shows outflows of $3.4bn year-to-date versus inflows of roughly $12bn last year, and record highs of over $42bn in 2017.1

Notwithstanding our constructive outlook for the asset class next year, we highlight potential risks. First, a delayed deployment of vaccines in EM would require extended policy support by governments, exacerbating fiscal and debt sustainability concerns, particularly in countries that entered the pandemic with fragile balance sheets. There exists the potential for debt restructurings and defaults, though in our view, they would not pose a systemic risk for the asset class. We believe that an active approach to investing in EM debt is an effective way to help ameliorate these risks.

More generally, a delayed transition to fiscal consolidation, whether it is caused by logistical hurdles in deploying vaccines in EM or by governments’ reluctance to incur the political cost of fiscal austerity, may prompt the market to demand higher risk premia in EM fixed income assets. Finally, optimism about reduced trade frictions under a Biden administration (particularly, in U.S.-China relations) may prove to be faulty and could challenge our positive scenarios for global trade and growth, and thus negatively impact the performance of high-beta-to-growth EM assets.

Emerging market debt provides relatively higher yields and the potential for strong 2021 returns. While there are risks for EMD in 2021, we believe the tailwinds of strong monetary and fiscal support, coupled with the delivery of the COVID vaccine, along with a potentially weaker U.S. dollar, lay the foundation for a continuation of last quarter’s strong rally.

 
 

1 Source: JP Morgan

 
 

RISK CONSIDERATIONS

There is no assurance that a Portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the Portfolio will decline and that the value of Portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this Portfolio. Please be aware that this Portfolio may be subject to certain additional risks. Fixed income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. In a declining interest-rate environment, the portfolio may generate less income. Longer-term securities may be more sensitive to interest rate changes. High yield securities (“junk bonds”) are lower rated securities that may have a higher degree of credit and liquidity risk. Foreign securities are subject to currency, political, economic and market risks. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed countries. Sovereign debt securities are subject to default risk. The use of leverage may increase volatility in the Portfolio. Illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk). Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks. Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility.

 
eric.baurmeister
Head, Emerging Markets Debt
Global Fixed Income Team
 
warren.mar
Head, Emerging Markets Corporate Debt
Global Fixed Income Team
 
sahil.tandon
Portfolio Manager Emerging Markets Debt
Global Fixed Income Team
 
 
 
 

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results.

The views, opinions, forecasts and estimates expressed of the author or the investment team as of the date of preparation of this material and are subject to change at any time due to market, economic or other conditions. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date of publication. The views expressed do not reflect the opinions of all portfolio managers at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

Forecasts and/or estimates provided herein are subject to change and may not actually come to pass. Information regarding expected market returns and market outlooks is based on the research, analysis and opinions of the authors. These conclusions are speculative in nature and are not intended to predict the future performance of any specific Morgan Stanley Investment Management product.

This material is a general communication, which is not impartial and all information provided has been prepared solely for informational and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

This communication is not a product of Morgan Stanley’s Research Department and should not be regarded as a research recommendation. The information contained herein has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

Certain information herein is based on data obtained from third-party sources believed to be reliable. However, we have not verified this information, and we make no representations whatsoever as to its accuracy or completeness.

This communication is only intended for and will be only distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.

There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Prior to investing, investors should carefully review the strategy’s/product’s relevant offering document. There are important differences in how the strategy is carried out in each of the investment vehicles.

Ireland: MSIM Fund Management (Ireland) Limited. Registered Office: The Observatory, 7-11 Sir John Rogerson's Quay, Dublin 2, D02 VC42, Ireland. Registered in Ireland as a private company limited by shares under company number 616661. MSIM Fund Management (Ireland) Limited is regulated by the Central Bank of Ireland. United Kingdom: Morgan Stanley Investment Management Limited is authorised and regulated by the Financial Conduct Authority. Registered in England. Registered No. 1981121. Registered Office: 25 Cabot Square, Canary Wharf, London E14 4QA, authorised and regulated by the Financial Conduct Authority. Dubai: Morgan Stanley Investment Management Limited (Representative Office, Unit Precinct 3-7th Floor-Unit 701 and 702, Level 7, Gate Precinct Building 3, Dubai  International Financial Centre, Dubai, 506501, United Arab Emirates. Telephone: +97 (0)14 709 7158). Germany: MSIM Fund Management (Ireland) Limited Niederlassung Deutschland, Grosse Gallusstrasse 18, 60312 Frankfurt am Main, Germany (Gattung: Zweigniederlassung (FDI) gem. § 53b KWG). Italy: MSIM Fund Management (Ireland)Limited, Milan Branch (Sede Secondaria di Milano) is a branch of MSIM Fund Management (Ireland) Limited, a company registered in Ireland, regulated by the Central Bank of Ireland and whose registered office is at The Observatory, 7-11 Sir John Rogerson's Quay, Dublin 2, D02 VC42, Ireland. MSIM Fund Management (Ireland) Limited Milan Branch (Sede Secondaria di Milano) with seat in Palazzo Serbelloni Corso Venezia, 16 20121 Milano, Italy, is registered in Italy with company number and VAT number 11488280964. The Netherlands: MSIM Fund Management (Ireland) Limited, Rembrandt Tower, 11th Floor Amstelplein 1 1096HA, Netherlands. Telephone: 31 2-0462-1300. Morgan Stanley Investment Management is a branch office of MSIM Fund Management (Ireland) Limited. MSIM Fund Management (Ireland) Limited is regulated by the Central Bank of Ireland. France: MSIM Fund Management (Ireland) Limited, Paris Branch is a branch of MSIM Fund Management (Ireland) Limited, a company registered in Ireland, regulated by the Central Bank of Ireland and whose registered office is at The Observatory, 7-11 Sir John Rogerson's Quay, Dublin 2, D02 VC42, Ireland. MSIM Fund Management (Ireland) Limited Paris Branch with seat at 61 rue de Monceau 75008 Paris, France, is registered in France with company number 890 071 863 RCS. Switzerland: Morgan Stanley & Co. International plc, London, Zurich Branch Authorised and regulated by the Eidgenössische  Finanzmarktaufsicht ("FINMA"). Registered with the Register of Commerce Zurich CHE-115.415.770. Registered Office: Beethovenstrasse 33, 8002 Zurich, Switzerland, Telephone +41 (0) 44 588 1000. Facsimile Fax: +41(0) 44 588 1074.

Hong Kong: This document has been issued by Morgan Stanley Asia Limited for use in Hong Kong and shall only be made available to “professional investors” as defined under the Securities and Futures Ordinance of Hong Kong (Cap 571). The contents of this document have not been reviewed nor approved by any regulatory authority including the Securities and Futures Commission in Hong Kong. Accordingly, save where an exemption is available under the relevant law, this document shall not be issued, circulated, distributed, directed at, or made available to, the public in Hong Kong. Singapore: This document should not be considered to be the subject of an invitation for subscription or purchase, whether directly or indirectly, to the public or any member of the public in Singapore other than (i) to an institutional investor under section 304 of the Securities and Futures Act, Chapter 289 of Singapore (“SFA”); (ii) to a “relevant person” (which includes an accredited investor) pursuant to section 305 of the SFA, and such distribution is in accordance with the conditions specified in section 305 of the SFA; or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. This publication has not been reviewed by the Monetary Authority of Singapore. Australia: This publication is disseminated in Australia by Morgan Stanley Investment Management (Australia) Pty Limited ACN: 122040037, AFSL No. 314182, which accept responsibility for its contents. This publication, and any access to it, is intended only for “wholesale clients” within the meaning of the Australian Corporations Act.

Japan: For professional investors, this document is circulated or distributed for informational purposes only. For those who are not professional investors, this document is provided in relation to Morgan Stanley Investment Management (Japan) Co., Ltd. (“MSIMJ”)’s business with respect to discretionary investment management agreements (“IMA”) and investment advisory agreements (“IAA”). This is not for the purpose of a recommendation or solicitation of transactions or offers any particular financial instruments. Under an IMA, with respect to management of assets of a client, the client prescribes basic management policies in advance and commissions MSIMJ to make all investment decisions based on an analysis of the value, etc. of the securities, and MSIMJ accepts such commission. The client shall delegate to MSIMJ the authorities necessary for making investment. MSIMJ exercises the delegated authorities based on investment decisions of MSIMJ, and the client shall not make individual instructions. All investment profits and losses belong to the clients; principal is not guaranteed. Please consider the investment objectives and nature of risks before investing. As an investment advisory fee for an IAA or an IMA, the amount of assets subject to the contract multiplied by a certain rate (the upper limit is 2.20% per annum (including tax)) shall be incurred in proportion to the contract period. For some strategies, a contingency fee may be incurred in addition to the fee mentioned above. Indirect charges also may be incurred, such as brokerage commissions for incorporated securities. Since these charges and expenses are different depending on a contract and other factors, MSIMJ cannot present the rates, upper limits, etc. in advance. All clients should read the Documents Provided Prior to the Conclusion of a Contract carefully before executing an agreement. This document is disseminated in Japan by MSIMJ, Registered No. 410 (Director of Kanto Local Finance Bureau (Financial Instruments Firms)), Membership: The Japan Securities Dealers Association, the Investment Trusts Association, Japan, the Japan Investment Advisers Association and the Type II Financial Instruments Firms Association.

U.S.: A separately managed account may not be appropriate for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objective risks and fees of the Strategy carefully before investing. A minimum asset level is required. For important information about the investment manager, please refer to Form ADV Part 2.

Please consider the investment objective, risks, charges and expenses of the fund carefully before investing. The prospectus contains this and other information about the fund. To obtain a prospectus, download one at morganstanley.com/im or call 1- 800-548-7786. Please read the prospectus carefully before investing.

Morgan Stanley Distribution, Inc. serves as the distributor for Morgan Stanley funds.

NOT FDIC INSURED | OFFER NO BANK GUARANTEE | MAY LOSE VALUE | NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY | NOT A DEPOSIT

IMPORTANT INFORMATION

EMEA: This marketing communication has been issued by MSIM Fund Management (Ireland) Limited. MSIM Fund Management (Ireland) Limited is regulated by the Central Bank of Ireland. MSIM Fund Management (Ireland) Limited is incorporated in Ireland as a private company limited by shares with company registration number 616661 and has its registered address at The Observatory, 7-11 Sir John Rogerson's Quay, Dublin 2, D02 VC42,  Ireland. 

The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.

MSIM has not authorised financial intermediaries to use and to distribute this document, unless such use and distribution is made in accordance with applicable law and regulation. Additionally, financial intermediaries are required to satisfy themselves that the information in this document is appropriate for any person to whom they provide this document in view of that person’s circumstances and purpose. MSIM shall not be liable for, and accepts no liability for, the use or misuse of this document by any such financial intermediary.

This document may be translated into other languages. Where such a translation is made this English version remains definitive. If there are any discrepancies between the English version and any version of this document in another language, the English version shall prevail.

Morgan Stanley Investment Management is the asset management division of Morgan Stanley.

The whole or any part of this work may not be directly or indirectly reproduced, copied, modified, used to create a derivative work, performed, displayed, published, posted, licensed, framed, distributed, or transmitted or any of its contents disclosed to third parties without MSIM’s express written consent. The work may not be linked to unless such hyperlink is for personal and non-commercial use. All information contained herein is proprietary and is protected under copyright law.

 

 

It is important that users read the Terms of Use before proceeding as it explains certain legal and regulatory restrictions applicable to the dissemination of information pertaining to Morgan Stanley Investment Management's investment products.

The services described on this website may not be available in all jurisdictions or to all persons. For further details, please see our Terms of Use.

Not FDIC Insured—Offer No Bank Guarantee—May Lose Value
Not Insured By Any Federal Government Agency—Not A Deposit

Subscriptions    •    Privacy & Cookies    •    Terms of Use

©  Morgan Stanley. All rights reserved.

Morgan Stanley Distribution, Inc. Member FINRA/SIPC.