Head, Rates & Credit Research
Outlook for EM exports should improve as European economies recover
Financial linkages are more important for EM risk assetsWhile growth and trade linkages are more obvious, there is also a strong financial-market connection between EM and Europe. Europe has been an important source of fund flows into EM over the years. These flows have picked up significantly since the European financial crisis earlier this decade, when investors became concerned about their exposure to Europe. More importantly, European bond yields collapsed as the European Central Bank (ECB) embarked on a large quantitative easing programme (Figure 3), forcing much of the money to seek alternative investment destinations. Emerging Europe was the initial beneficiary of these flows, but subsequently, other EM regions have also seen healthy flows from Europe. Global bond yields are still very low (Figure 4), with more than 60% of bonds yielding less than 2%. This has resulted in heavy outflows from developed markets like Europe into EM fixed income; Asia has been a big beneficiary of these flows given its higher ratings relative to other EM regions.
Will we see a reversal of these flows?
EM fixed income is more at risk, but it’s not time to worry yet
Finally, we see further scope for European pension funds to add to their exposure to EM fixed income; EM fixed income represents around 4% of their portfolio (Figure 9). So while cyclical pressures may emerge short-term, especially with the rise in euro-area bond yields, structural investment in EM may continue to increase. Asia in particular offers an attractive combination of high ratings and healthy risk-adjusted returns – and warrants a position in European portfolios.
Euromoney and Standard Chartered will be running a series of webinars on debt capital markets. The next will be ‘India states’ finances and borrowings: The other half of the story’ on July 19. Find out more.
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