Trade war threatens to derail emerging market bond rally

Bloomberg

The best returns in a decade for emerging-market bonds just got a further boost as central banks move towards more easing. Now fund managers must navigate trade tensions and geopolitics that could derail the rally.
Investors are optimistic after the Federal Reserve signalled it was ready to cut interest rates and the European Central Bank indicated more stimulus may be on the way. But money managers are tempering their outlook with caution on the planned meeting between Donald Trump and Xi Jinping at the G-20 summit this week, and amid tensions in the Middle East.
“We are bracing ourselves” for the US-China trade war to continue, said Angus Bell, a senior portfolio manager in emerging-market debt at Goldman Sachs Asset Management, who doesn’t see a resolution to the trade dispute in the near future. The money manager expects “mid-single digit returns” for the rest of the year in EM dollar bonds.
Union Investment Privatfonds GmbH says there is the risk that somewhere a human factor will lead to an accident. Tensions between US and Iran have surged after downing of US drone and attacks on tan-kers. Amid the trade uncertainties, Schroder Investment Management says that in Asia, most investment-grade issuers should be less affected given they aren’t directly exposed to global trade and will benefit from strong Chinese economic policy support.
Asia’s strong economic fundamentals also make Japan’s Asset Management One Co. prefer emerging-market credits from the region, which they expect will be more resilient in a risk-off scenario.
Even after emerging-market dollar bonds scored a 9% return from December 31, the most for any similar period in a decade, many investors still see them continuing to do well, as monetary easing burnishes the appeal of the higher-yielding assets.
“If we see a period of somewhat slower US growth, the Fed cutting rates, but not a US recession, that is generally a pretty good environment for emerging-market fixed income,” said Brett Diment, head of global emerging-markets debt at Aber- deen Standard Investments. He expects a de-escalation in frictions as the 2020 US presidential election nears and Trump focusses on re-election.
Asia investment-grade debt continues to be one of the relatively higher-yielding markets in the IG world, according to Angus Hui, head of Asian credit and emerging-market credit at Schroder Investment Management:
Indian and Indonesian corporates offer good relative value and election risk is out of the way in both countries, said Sergey Dergachev, senior portfolio manager at Union Investment Privatfonds GmbH in Frankfurt.