2016 was a year of recovery for emerging markets debt. All sectors posted positive returns led by a 10.2% return for emerging market hard currency debt.
Interestingly enough, this time last year, the market was questioning the sector's fundamental foundation: commodity prices were near cycle lows with oil approaching $30; emerging market currencies just posted a third consecutive year of negative returns; hard currency spreads were on the way to +500 basis points; and local yields stood at their highest levels since the 2013 taper tantrum. Not only did Brazil face a political and confidence crisis, but concerns mounted about China's growth outlook.
On the way to 2017, hard currency spreads tightened to a low of +330 basis points, and Brazil seated a new president and posted double-digit total returns across multiple asset classes. China re-engaged its fiscal stimulus, commodities and emerging market currencies bounced, and emerging market fundamentals generally strengthened relative to 2013.
As 2016 concluded, a host of uncertainties emerged, including the potential for a more protectionist U.S. administration, higher U.S. Treasury yields and assurances from the Federal Reserve that it would seek multiple rate hikes in the coming years. Yet, looking forward, this backdrop also brings the prospect for faster global growth, and, combined with solid fundamentals and attractive valuations, the scene might be set for healthy returns within emerging markets debt in 2017.
While the policies of the new U.S. administration are far from certain, its interests so far do not appear consistent with the most extreme protectionist rhetoric that characterized the campaign. Therefore, our base case is not for outsized fiscal largesse, but an agenda likely to be growth positive. Indeed, we recently raised our 2017 global growth estimate to 3.4%, and our current forecast for emerging market growth of 4.4% in 2017 is notably faster than our 2016 estimate of 3.6%.