Cautiously Optimistic

December 2004 | Bond Sentiment Index

Plus ça change. On a fundamental basis alone, EM debt in general should continue to perform well next year. Positive economic growth - driven by exports and a recovery in domestic demand - ever-improving fiscal dynamics, and the potential for ratings upgrades will provide underlying support for the asset class. The key risk, as witnessed in April of this year, remains the US Treasury market, and the potential for a disorderly unwinding of global financial market imbalances. Although EM debt has decoupled impressively from the UST 10-year price action over the past few weeks, it would not be able to withstand a noticeable rise in US yields. With spreads trading at or close to all-time highs, it is very much a case of survival of the fittest - the title of our last Bond Sentiment article - with differentiation between credits key, and possibly preference for local debt instruments in certain cases. This view is reflected in our December index, in which the surveyed investment banks maintain a broadly optimistic stance on selective sovereigns, whilst at the same time remaining very much aware of the external storm clouds.

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