Schroders’ economics team has downgraded its outlook on emerging market debt from overweight to underweight as investors continue to move away from the asset class.
In its latest Global Market Perspective report, the team updates it asset allocation views for the coming three months and highlights a number of negative factors that could reduce the investment case for EMD.
Schroders chief economist Keith Wade writes: “We have become negative on USD-denominated emerging market debt as investor fund outflows could continue given the downbeat sentiment towards this asset class. This underscored by the weaker growth dynamics in these economies along with the rise in policy tightening expectations in the US.”
Emerging market bonds have been hit by a significant sell-off over recent weeks after fears returned of a looming economic slowdown in China and concern mounted that the Federal Reserve could slow its $85bn-a-month quantitative easing.
David Jane’s TM Darwin Multi Asset fund recently sold all of its EMD holdings because he expects them to suffer if the Fed starts to taper QE, while BlackRock Corporate Bond fund co-manager Simon Blundell said he is “not interested” in the asset class.
Schroders’ economics team remains positive on high yield bonds and neutral on investment grade. “Whilst valuations are not overly compelling, the demand for higher yielding defensive assets remains significant given the sluggish growth backdrop,” Wade writes.
It also has an underweight stance towards developed market government bonds, although this is less of an underweight than it had in the second quarter.
“The gradual healing of the world economy and the recent comments from the Fed suggests that there will be upward pressure on yields,” Wade explains. “Amongst the bond markets, our strongest underweight conviction is towards US Treasuries give the continued signs of improvement in the housing market and banking system.”