Slower growth for emerging market bonds in 2nd half of 2017 - analysts

Cape Town – The inflow of money into emerging market debt is expected to slow down in the second half of 2017 on the back of tighter monetary policy in the US among other things, said financial services company BlackRock.

Pablo Goldberg and Sergio Trigo Paz from BlackRock’s emerging market debt team noted in a company report that they foresee a more muted second half for emerging markets after a good performance in the first half of the year with a 10.7% return on local debt.

BlackRock cited a JPMorgan report estimating that year-to-date inflows into tradeable emerging market fixed income funds are $45.3bn – the highest level for the six months of a given year in the last five years.

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Although BlackRock expected 2017 to be governed by strong populism in developed markets, the Donald Trump presidency has not been as protectionist as was initially thought. “There has been little done on the protectionist side despite the many campaign threats.”

In addition, market-friendly candidates won the Dutch and French elections.

“A benign inflation-policy outlook in the US resulted in a collapse of market volatility and led to strong inflows into emerging market debt, BlackRock said.

“We estimate that volatility and flows drove most of the appreciation in emerging market bonds and currencies so far this year.”

The company however points out that the “engines” that took emerging markets higher during the first half of the year are likely to lose thrust in the second half, leading to more muted returns going forward, but pointed out this does not necessarily mean a reversal in the gains made year-to-date.

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The likelihood of excess returns for emerging markets has shrunk, as global liquidity conditions could start “tightening”.

“Despite three rate hikes by the US Fed (Federal Reserve) in the last 12 months US financial conditions have gotten easier,” BlackRock said.

This, coupled with tighter labour markets has prompted the Fed to continue normalising interest rates.

BlackRock expects emerging market recovery to consolidate going forward. The rally in commodity prices and supportive global financial conditions suggest that emerging market growth may have peaked in the first quarter of the year.

The company foresees that returns in emerging market debt will be between 2% and 3% for the rest of 2017.