Investment Insights: Divergent trends, increased opportunities - J.P. Morgan Asset Management

Investment Insights: Divergent trends, increased opportunities

Contributor Pierre-Yves Bareau

EM debt assets have maintained a strong run of performance year-to-date (Exhibit 1). Credit sectors, both sovereign and corporate, have outperformed, posting high single-digit returns. Local markets have lagged somewhat, with positive rates performance undermined by broad-based EM currency weakness relative to the U.S. dollar.

Positive EM debt performance has been largely driven by well-anchored and rangebound developed market rates, which supported the asset class despite concurrent risks stemming from a busy political calendar and some geopolitical stresses. EM currency weakness has been largely a function of an overall theme of U.S. dollar strength and idiosyncratic stories: the Russia/Ukraine stand-off, commodity price weakness and electoral uncertainties.


Increasing economic divergence

Looking ahead, our base-case scenario is one of muddle-through performance from EM economies, characterised by slowing momentum. We expect the growth environment to remain broadly challenging, with increased divergence between developed markets and within emerging markets as a group. Data prints continue to point toward economic recovery in the U.S., with gradually improving labour market conditions, an uptick in household spending and advancing business fixed investment. The developing picture from the eurozone could not be more striking, where economic stagnation remains a threat and inflation has fallen well below the ECB’s target of “close” to 2%.

Growth challenges also persist within emerging markets, with an economic slowdown in China and a broad decline in private expenditure growth restricting momentum. However, it should be noted that the picture here is not uniform and divergence within emerging markets can be observed across the board. This divergence is made clear through our proprietary leading economic indicators, which describe a wide variation across emerging economies. This divergence ultimately provides a great opportunity for differentiation, one of our key investment themes discussed further below.

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Important information

Please be aware that this material is for information purposes only. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are, unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all-inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. JPMorgan Asset Management Marketing Limited accepts no legal responsibility or liability for any matter or opinion expressed in this material.

The value of investments and the income from them can fall as well as rise and investors may not get back the full amount invested. Past performance is not a guide to the future.