Interest rate increases in the developed countries won’t necessarily spell the end of good returns on emerging market debt, says Rashique Rahman, fixed-income strategist in global emerging markets at HSBC in New York. Favorable global market dynamics have set in motion a virtuous cycle for emerging market debt, whereby strong global growth is fueling commodity demand and better terms of trade for EM countries that export commodities, leading to improvements in their creditworthiness and balance sheets, Rahman says.
Spreads of EM sovereign debt over three-month US treasury bills have narrowed significantly, and the potential for further spread tightening mitigates the potential direct impact of higher US rates on overall EM debt market performance, Rahman says.
“We are less concerned about marginally higher interest rates in the developed countries than we are about global growth prospects,” Rahman explains. He predicts that EM debt spreads will tighten by another 20 basis points. Philip Poole, global head of EM research and chief EM economist at HSBC, says growing remittance flows from overseas workers provide stability to EM currencies. He says there is no future outflow associated with remittances that could result in a drag on future growth.