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Fixed Income Outlook 2016

The Emerging View

14 January 2016

2016 may well turn out to be ‘Sweet Sixteen’ for Emerging Markets (EM). The wobbly start for global financial markets in 2016 should not detract attention from the fact that the fundamental situation in EM is significantly better with many important shocks out of the way and major external rebalancing underway. EM growth will accelerate away from developed markets for the first time since 2011, in our view. Valuations are attractive in absolute terms with EM bonds trading at higher yields than when the Fed fund rate was 5.375% and in relative terms EM sovereign and corporate spreads over Treasuries exceed 400bps, several times previous tights. By contrast, developed markets look expensive and tired after years of excessive monetary stimulus and insufficient attention to fundamentals. The US business cycle is struggling with ‘late cycle blues’ and the outlook for the US dollar is more balanced than for several years.

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