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Local Currency Bonds: the stars are still aligned
06 March 2017
Six months ago we outlined the reasons for turning bullish on Emerging Markets local currency bonds for the first time since the Taper Tantrum of 2013. Since then, the election of Donald Trump led to an increase in volatility, particularly in Mexico, but Trump-related uncertainty was not enough to derail the asset class. Instead, local currency bonds gained further momentum in line with growing expectations of reflationary policies in the US.
This Market Commentary has two objectives. Firstly, we update the outlook for EM local currency bonds by drawing up return scenarios for the next five years. We think the case remains strong and urge investors to take notice. Secondly, we outline the outlook for the US dollar, which obviously matters a great deal for returns in EM local markets. Our base case is that the Dollar will decline gently over the next few years barring extremely positive growth in the US or extremely bad political events in Europe. This backdrop should be supportive for EM local markets.