EM Debt Withstands Latest Shocks: DB

EM sovereign debt should weather the rising oil prices and inflation relatively well, says Nicolas Schlotthauer, head of EM debt at DB Advisors. The firm has $230bn under management globally, with certain LatAm names well-positioned to perform. “There is a mixed impact from the oil price, but it should not derail the economic growth story,” the investor tells reporters in New York. The current environment is not extremely negative for economic growth, he explains, and also helps some emerging economies which are oil exporters. Schlotthauer expects further tightening in the EMBI spread, now at 280bp-290bp. He says the spread will tighten, but is unlikely to tighten any further than that before the end of the year. The quality of the economic fundamentals of many countries in the index – both investment grade names and those close to investment grade – has improved, and drawn in investors both on spread tightening potential technical factors and more fundamental factors, he says. “There are countries which will still continue to develop in macroeconomic terms and will still offer a great risk premium,” he says, highlighting Chile and Peru as better placed LatAm names. Peru, in particular, benefits from improving fundamentals and an increasing ability to fund in its own currency, he says. Among local-currency issuers, Mexico is interesting from a currency perspective and from the local rates perspective, he says, and offers great value in the medium term. Brazil offers great fundamentals, but the IOF tax makes it less attractive than Mexico and some local government markets in other EM regions, such as Poland. Argentina and Venezuela’s external bonds could see upside on commodity price increases, particularly Venezuela, if oil prices continue to rise, he says.