Hard currency emerging market debt (EMD) has the potential to outshine other asset classes in the rising rates environment, particularly in the sovereign space.
This is according to Marcelo Assalin, head of emerging markets debt at NN Investment Partners.
Though EMD has seen outflows so far this year, the outflows trend is expected to reverse by year-end.
‘As technicals become more supportive, we will finally see EMD perform strongly again,’ Assalin told Citywire Asia.
NNIP has a constructive outlook for EMD for the next 12 months as valuations are looking attractive now.
‘We prefer hard currency debt in the sovereigns because there’s where we see valuations are most attractive,’ Assalin said.
Meanwhile, NNIP is less constructive on local currency debt over appreciation of the US dollars, given the US is leading the global business cycle.
Within sovereign debt space, NNIP prefers to invest in high-yielding sovereign debt over investment grade sovereign debt, mainly because investors are compensated for taking additional risks at this point.
‘We like countries that have direct relationship with oil prices, particularly in the sub-Saharan region,’ Assalin said, adding that NNIP overweights countries like Angola and Gabon.
Within sub-Saharan region, the firm also has a constructive view for Nigeria. ‘We are not overweight yet. We believe they will issue bonds in the near term and we will take that position to overweight.’
In addition, NNIP said it has a constructive view on countries in the Gulf Cooperation Council (GCC) region, mainly because they will be included in JP Morgan Embi Global Diversifed Index, which is the most representative benchmark that NNIP tracked, over the next few months.
The inclusion of the GCC countries, such as Saudi Arabia, Qatar, Kuwait and Emirates, in the JP Morgan Embi Global Diversifed Index is expected to generate a lots of flows.
What’s more, countries in the GCC region have very high quality ratings and are set to benefit from higher oil prices, Assalin said.
NNIP is overweight on the GCC region and has positioned its EMD portfolio to take advantage of that.