Niche no more

The following is an extract from our article: Niche no more: Is investment grade corporate emerging market debt an asset class whose time has come?

As a group, emerging markets have generally weathered the shocks of the 2020s well. Having emerged from the pandemic and the bout of inflation that followed it reasonably well, we see them as well positioned moving forward.

Today, emerging markets (EMs) now make up around 50% of global GDP; by 2050, this proportion is set to grow to 65%. This 15% jump is reminiscent of the mid-1990s to mid-2000s heyday of EM growth; indeed, over the next 20 years 70% of global economic growth is anticipated to be in EMs[1].

One factor underpinning this striking forecast is the increasing resilience and effectiveness of institutions in EMs – particularly central banks.

We saw this in their responses to the wave of inflation that followed Covid-related supply chain shocks and was sustained by the impact of the war in Ukraine. EM central banks stuck to economic orthodoxy on the whole, hiking rates in mid-2021 at a time when policymakers at the US Federal Reserve (Fed) had still not made inflation their primary concern. 

This more hawkish stance has paid off, with many EM central banks loosening policy early this year while the Fed was only able to do so in September. Simply put: we think the EM central banks were more on the ball, and their home economies have benefited from their ability to cut rates earlier. 

A supportive macro picture

Another factor is the macroeconomic evolution and maturation of some EMs. Investors with long memories will remember the days when they were often tagged with ‘sudden stop risk’, with recurrent crises triggering large and rapid capital outflows – as we saw in Mexico’s ‘Tequila crisis’ in 1992 or the 1997 Asian financial crisis. 

Under today’s conditions, we see the risks of such situations as minimal. This is because many EMs are now creditor nations; even those that are debtors, like Indonesia or Mexico, exhibit current account deficits that as a share of GDP are well within what we would consider safe bounds[2].

You can read the full article here.

 
[1] Source: IMF forecasts, LGIM calculations as of 27 September 2024
[2] Source: National sources, Bloomberg as of 17 September 2024.