Lombard Odier Investment Managers’ chief investment strategist Salman Ahmed (pictured) has shared his outlook on emerging markets debt in a recent press briefing held in London.
Ahmed first highlighted quarterly risk factors shifts in the emerging market space from Donald Trump’s entry at the White House last January to North Korea’s missile crisis the last few weeks. However, he said a permanent risk remains China’s economic situation.
LOIM’s chief investment strategist praised the improvement and growing resilience of EM fundamentals, expecting the spread between emerging economies’ GDP and that of developed economies to increase at fast pace over the next five years.
EM real rates linger at the top-end of the range and disinflationary trends in most inflated EM economies are occurring, he exposed before estimating that EM currencies were an undervalued play (15%-20% undervalued).
Speaking of China, Ahmed assessed that if a major economic issue arises there, the whole EM story would eventually collapse. He underlined inflation is on the way for the Chinese economy while main tail risks are contained currently.
Ahmed recalled that China remains the world’s number one net creditor, holding about $2trn of net foreign assets. Concerns around the country’s leverage speeding up will remain but LOIM’s investment chief strategist said that Chinese authorities have shown willingness to use backstops in order to slowdown the pace of debt leveraging practrices and further resolve the issue.
“China’s M2 – that has grown to a record-low in June 2017 – is five times the foreign reserves it holds. If faith is lost in China, its reserves will not be able to cope with investors’ outflows,” explained Ahmed, adding that China still has time to deliver the system of the leveraging debt issue.
In addition, he warned: “We feel like China has become a champion of free trade because the country slightly opened itself to the rest of the world. But China remains a very closed economy.”
Ahmed thereafter discussed the relationship of emerging markets to the United States. He argued that the sensitivity of emerging markets to the Fed rate hikes is declining thanks to the improvement of EM fundamentals.
Moreover, he suggested that the trade protectionism defended by Donald Trump looked like a trade stagnation rather than a trade reversal.
Nevertheless risks of tensions could emerge between China and the US over North Korea’s behaviour, Ahmed said.