As we think about 2020, the biggest concern in emerging markets (EM) revolves around the contagion risks linked to US-China trade negotiations and possible knock-on effects of a divisive US election year.
Heading into the US election, we are likely to see a managed trade truce with China, where President Donald Trump wants to focus more on growth and positivity.
An abrupt move in expectation for rates to move meaningfully higher, a heightened geopolitical risk and material developed market (DM) slowdown are also risks for investors to keep an eye on.
Also worth keeping an eye on are the unintended consequences that could arise from global discontent. Several EM regions - Hong Kong, Ecuador, Bolivia, Chile, Peru, Indonesia and Lebanon have been engulfed in waves of civil protests.
These situations certainly represent risks for investors but we have also continued to find value opportunities in EM corporate issuers - often globally diversified companies - that have been unfairly punished by markets because of their country of domicile.
Given the material amount of negative-yielding assets in developed markets, asset classes that offer decent positive yields, such as high yield and EM debt will likely remain attractive over the next year.
Looking at EM corporates, it has seen a significant growth in the last decade and is now maturing as an asset class with lower volatility.
In addition, corporate fundamentals have been stable, with many companies exhibiting solid growth in revenues and EBITDA over the past few years.
Balance sheets appear healthy and defaults have remained low with the expectation of supportive growth in emerging markets.
Within the broader universe of EM corporates, short-duration high yield debt looks interesting.
Given the various idiosyncratic risk flare-ups in several high yield countries over the last few years, spreads have widened relative to investment grade-rated EM corporates.
While this has normalised somewhat in recent months, the spread differential is still wide relative to history, suggesting there is still value in high yield-rated EM corporates.
Omotunde Lawal is head of emerging markets corporate debt group at Barings
• Maturing asset class displaying higher Sharpe ratios making for a compelling risk reward
• Elevated spread in the high yield segment as corporates are unfairly punished for idiosyncratic sovereign events, which create opportunities to find gems
• Macro factors are the main risk to EM corporates in 2020
• EM markets likely facing more political risk in the future following swathes of social unrest in parts of the globe