A softer dollar to boost emerging market debt in 2024?

After a challenging 2022, emerging market debt (EM debt) has performed well in 2023, points out GAM Investments. According to the asset manager, the asset class outperformed US government bonds and investment-grade credit this year.

As per Paul McNamara, Investment Director and Lead Manager on Emerging Market Debt Strategies at GAM Investments, there are indications that the US economy could be headed for a soft or bumpier ‘landing’. As for the European economy, he says,“…overall, the economic picture there remains fairly solid.”

McNamara explains that even though the credit conditions have tightened over the Eurozone and borrowing has declined, growth figures have been strong. “Europe is by no means out of the woods, but there are clear signs that the economy is hanging in there,” suggests the asset manager.

Subsequently, GAM Investments indicates that emerging markets will be impacted by negative sentiment in case there is a global recession. It also states that the economic growth gap between the US and other economies needs to narrow for EM debt to realise its potential. 

The asset manager then highlights that things are playing out better now as the massive gap in growth and interest rates between the US and Europe are notably moving against the US Dollar. “…local EM debt benchmarks have returned in the region of 4%, emphasising how a softer USD adds to the return prospects for this asset class,” says the asset manager.

As for emerging market debt, GAM Investments believes that a combination of high rates and falling inflation is the ideal strategy for local EM bonds. McNamara prefers Mexico and Brazil for these reasons. He also expresses a preference for Indonesia based on various other factors.

Besides, GAM Investments addresses concerns over China’s economic health impacting EM assets. According to the asset manager, Chinese credit growth remains extremely strong, lending support to the GDP. “In fact, Chinese growth is doing just fine, and as long as that is the case, that can act as a positive backdrop for other EM regions, especially for South America,” opines GAM.

As for the EM debt outlook for the next year, McNamara says, “Should conditions fall into place for the US economy to lose some of its glow relative to other parts of the world into 2024, then EM debt should be well-placed to step out from the dollar’s shadow.”

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