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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.