The Rising Tides Should Lift Many Boats
The best opportunities in EM sovereigns remain in high-yield countries where assets remain mispriced and fiscal improvement is likely. But the benefits will accrue from different streams and waves.
For example, South Africa is a low-growth country with high fiscal deficits and whose bonds were heavily impacted by the COVID-19 crisis. The pandemic exposed economic and fiscal vulnerabilities, but it also led to—or forced—promising political and policy reform. South Africa is also likely to be a big beneficiary of rising commodity prices and global growth.
While Angola would also benefit from rising oil prices and global growth, further buoyancy for Angola would come from a new round of SDR funding, given their high external financing needs and an SDR that comprises a large portion of their existing reserves. Similarly, Ukraine would also be an outsized beneficiary of a new IMF SDR allocation.
We believe the impetus for cyclical uplifts for other EM countries may be quite diverse. Remittance- and tourism-dependent El Salvador and Egypt, for example, came through the COVID-19 downturn better than expected, as remittances did not sink as much as expected. Still, both countries should benefit from remittances returning to more normal levels. Egypt will benefit over time from a return to more typical tourism flows, and El Salvador will benefit from the US recovery.
Finally, credits such as Argentina, have gone through restructuring, may be mispriced, trading on sentiment rather than fundamentals. Once Argentina has set medium-term economic policy based on negotiation with the IMF, we believe prices will move toward intrinsic value.
Investors should always be discriminating when investing in EM debt. But as we expect the greatest cyclical uplift over the next year in select EM high-yield sovereigns, those navigating these waters should be prepared with ongoing fundamental research to keep portfolios on course. Investors should have the opportunity to collect higher income while investing in economies ready to be lifted by cyclical waves.