Or at least as real as anything else in a world awash in liquidity looking for yield.
The writer, Scott Thiel is BlackRock's Chief Fixed Income Strategist.
From BlackRock's blog:
EM debt has rallied amid a perceived easing of trade tensions. Scott explains the investing implications.
One beneficiary of a perceived easing in the U.S.-China trade conflict: EM debt, which has rallied recently and outperformed developed market peers. We see factors further supporting EM debt from here: a likely Federal Reserve rate cut this week and the potential for a stable U.S. dollar; an EM growth rebound; and a temporary U.S.-China trade truce. We favor selected EM debt for its income potential. Yet likely twists and turns on trade talks in the near term keep us neutral on EM equities, which have greater exposure to China.
Fixed income yields generally remain near the bottom of their historical ranges, as global central banks’ dovish pivot has sent rates lower and bond prices higher. The chart shows how this is especially true of EM debt yields, which have fallen amid declining core government bond yields and tightening yield spreads. See the positions of the dots in the bars above. So far this year, both hard currency EM bonds – those mainly denominated in U.S. dollars – and their counterparts denominated in local EM currencies (so-called local currency bonds) have delivered strong returns. Hard currency has outperformed mainly due to U.S. Treasuries’ strong performance. Despite this outperformance, we favor local-currency markets. We see them having more room to run for the remainder of 2019, given our outlook for a range-bound U.S. dollar and the potential for monetary easing in many EMs amid benign inflation.....MORE
The case for local currency
The Fed’s dovish shift has helped local EM currencies recover versus the U.S. dollar, and this may persist in the near term. We see the Fed cutting rates this week and possibly again next year, as it seeks to provide insurance against a broad economic slowdown. Its recent injections of liquidity into money markets have also helped weaken the dollar and hold down rates, in our view. Other factors behind our positive view of local currency markets remain intact too. A manufacturing slowdown is weighing on EM growth, but the consumer side of the global economy has so far largely remained resilient. And we see limited risk of a meaningful slowdown or recession in the EM world – a scenario that would potentially send EM currencies lower; the International Monetary Fund expects EMs to drive a global growth recovery in 2020. We also see space for further central bank rate cuts in a number of EM countries, including in Indonesia, India, Brazil and Mexico, not least because EM inflation pressures appear to be skewed to the downside....
