External debt: OW in Eastern Europe, balanced approach

After enjoying a rebound in oil prices, reduced fears about Chinese growth and the weak dollar, the emerging countries received help from the Brexit.

In spite of the hawkish stance taken by Fed members post-Jackson Hole, the British vote reinforces the idea that monetary tightening in the US will be postponed, which is positive for the emerging markets.

With the exception of some countries like Mexico, which has experienced strong currency depreciation, most central banks will be able to go into greater depth in their accommodative stance or accentuate their rate-cut policy – a move favored by the stabilization of the currency and lower inflation pressures.

External debt: OW in Eastern Europe, balanced approach

The main medium term risks to the emerging market debt segment - namely the slowdown in China, fall in commodities and a potential Fed rate hike - have subsided over the summer. Furthermore, the segment is benefiting from investors “search for yield” in the current low rate environment. Asset class valuations are less attractive on absolute basis (trading at the 5Y average of 340), but are still attractive on relative basis (vs Core Rates and IG and HY Credit) Asset class technicals are neutral with the less supportive positive net issuance offset by relatively high cash levels, manageable investor positioning, and 'search for yield'

In this context, we maintain an overweight position in turnaround economies such as Argentina, Brazil, and selective Eastern European countries (Hungary, Croatia), where valuations appear attractive and yields are relatively high. We maintain our overweight positions to countries like Venezuela and Ecuador, where elevated yields compensate the deteriorating fundamentals. However, we also hold underweight positions in Nigeria, Gabon and Malaysia, where valuations are tight in relative terms.

We also aim to hold a low exposure to certain Middle East and North African countries such as Lebanon, which suffers from elevated political risk and less supportive technicals.

Local curves: Continues to be an attractive asset class

Local rates continue to benefit from EM disinflation and accommodative EM & DM central bank policies. As a result, we continue to see value in local rates and remain overweight on this segment. Near term risks have subsided post the recent NFP release as a September Fed rate hike is now less likely.

Consequently, we maintain our overweight on high yielders supported by high real rates and constructive disinflation such as Brazil, Colombia, Russia, and Indonesia. Accommodative monetary policies in emerging and developed markets favor exposure to the mid and long end of the curves.

On the other hand, South Africa exhibits elevated political risks and deteriorating fundamentals, leading to our underweight in the country. Our low exposure to Romania is a result of risks to the inflation and fiscal dynamics in the country.