Emerging markets fixed income delivered negative returns during Q2 2018. Worsening global conditions, rising political uncertainty and poor policy responses to financial pressures caused falls in asset prices amid limited liquidity and persistent outflows from the asset class.
Valuations have improved but nimble approach needed
We are more nimble in our assessment of potential returns in EM in Q3. In spite of widening spreads and rates and the significant weakening in EM FX, we don’t find these asset classes to be undervalued to the extent that it will make sense to have long beta positions. In contrast, we favor idiosyncratic and tactical stories until we have more clarity on how the current political and macroeconomic uncertainties may get resolved.