A tale of economic forces

Emerging market growth concerns lead to a new investment focus.

16 Sep 2019

A combination of factors is on track to drag down emerging market growth. While governments work with monetary and fiscal policies to fight off a global economic slowdown, tariffs and recession fears make bonds a better bet in the coming months.

Questions you can ask your UBS Financial Advisor

  • How should I update my weighting to stocks and bonds in emerging markets?
  • What are the risks of sovereign debt in emerging markets that I should be aware of?
  • Do negative yielding sovereign bonds ever make sense in my portfolio?

"We anticipate global growth to be uninspiring and below trend over the next six months," says Alejo Czerwonko, Ph.D., analyst in the UBS Chief Investment Office. "In our baseline scenario, we do expect the global economy to run fast enough to escape a recession. But in the near-term, monetary and fiscal easing are unlikely to be able to fully counteract the effect of higher tariffs."

Political and economic factors can impact one country's investments in a dramatic way. The surprise results of Argentina's August primary election led to a quick collapse in prices of both equities and sovereign bonds. Fortunately, the ripple effect was limited outside of Argentina.

"Within emerging markets, we strengthen our focus for carry assets over growth assets," according to Czerwonko. The UBS Chief Investment Office believes a focus on emerging market bonds is the right choice today. "We see strategic value in sovereign bonds denominated in US dollars."

Listen to Alejo Czerwonko on the UBS On-Air podcast and subscribe at Apple Podcasts or wherever you listen.

Slowing growth may have a negative result for emerging market equities. However, government bonds have less downside and lower expected volatility in the near-term than stocks. US denominated sovereign debt from the emerging markets is estimated to yield around five percent.

While competing economic forces may pull down emerging market stocks, there are always opportunities for investment success. Contact your UBS advisor today to review your emerging market strategy to make sure you're on the right track.

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