As liquidity is slowly drawn from the global economy, the recent wall of money beta- driven rally is likely to morph into a market with higher dispersion, in which BlackRock thinks alpha opportunities may take a stronger role as a source of excess returns in 2018.
According to Sergio Trigo Paz, Managing Director, Head of BlackRock’s Emerging Markets Fixed Income and Pablo Goldberg, Managing Director, Head of Emerging Markets Fixed Income Research and Portfolio Manager, EM high-yielding bonds will be delivering positive total returns in 2018 as developed market central banks gradually normalize monetary policy. As monetary policy normalization continues, a proper assessment of country-specific EM idiosyncratic risks and active differentiation is key to future returns and volatility of portfolios.
According to them, a ‘reflationary’ environment is supportive of further strengthening of emerging countries’ fundamentals, and in turn validates tighter spreads and stronger currencies in EMD. However, they are aware that EM countries find themselves at very different points in their business cycles, which should lead to divergent monetary policies.
Blackrock believes the best news are coming from Latin America, which has finally departed recession in 2017 and could grow 2.4% in 2018. They continue to like high yield oil exporting countries and stay short duration, and favor unconstrained strategies that allow dynamic duration management. Which is why they believe investors may want to consider switching from indexing to alpha strategies that may more efficiently capture the opportunities provided by a more volatile market that may likely gyrate between these alternative scenarios during 2018.
“We believe that a more flexible allocation to local debt, between IG and HY, and a dynamic duration management, to accommodate U.S. curve shifts, provides the potential to maximize excess returns for the rest of the year,” they conclude.