UBS: The unexpected rules of Emerging-Markets debt

Global economic activity is on a recovery path and market expectations have improved markedly, most noticeably in the US.

Emerging markets countries have made further progress addressing their structural and macroeconomic fragilities and are starting to feel the benefits of a more stable commodity price environment.

Divergence in global monetary policies is likely to increase further with Europe and Japan still in easing mode and the US in a hiking cycle.
President-elect Trump policies are likely to generate a boost to growth and inflation and a further sell-off in rates and strength in the US dollar in 2017.

We expect most emerging markets rates and currencies (versus the US dollar) to remain under pressure – except for those high yielders with a positive structural story.
We also expect credit spreads to tighten marginally as the positive income effect of higher US growth offsets the negative price effect of higher rates on emerging markets over time. Overall, the outlook for total returns in 2017 will depend on global growth and trade, US monetary policy and rates, and continued stability in commodity prices.

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