As we enter Q2, we see particular value in the hard currency and frontier market spaces within emerging market debt (EMD).
With idiosyncratic factors and country-specific risks coming to the fore in recent years, a selective approach is therefore essential.
Emerging markets (EMs) faced significant challenges in 2018.
The strong performance of the US economy and the continuation of monetary policy normalisation led to higher US treasury yields and a strong US dollar, which in turn impacted sentiment towards EM currencies.
Furthermore, geopolitical risks were running high in 2018, specifically US-China trade tensions, affecting the outlook for commodities.
Retail outflows in the second half of the year also drove fund managers to sell their positions in the latter months of 2018.
EM hard currency sub-asset classes have not experienced two consecutive years of negative returns for 20 years.
This highlights the strong mean-reverting characteristic of EM spreads, and underpins our positive outlook for the rest of 2019.
We expect global economic growth to be close to potential this year and the EM/developed market growth differential to resume its upward trend.
Given the high correlation between the growth differential and capital flows into EMs, we project a pick-up in capital flows this year.
Capital flows should remain a powerful factor driving returns, albeit slowing somewhat from the first months of 2019. The US Federal Reserve's recent dovish shift also gives EM central banks room to refrain from tightening in the coming months.
US-China trade tensions have subsided, which should boost investor sentiment and improve the outlook for global trade growth.
We expect Chinese growth to slow, as the country's policymakers continue the transition from an export-led model to a more sustainable domestic demand-led economy.
Still, China remains among the fastest growing economies, and the effects of its fiscal policy stimulus will become apparent in the months ahead.
Moreover, we also anticipate a very benign global inflation backdrop and ample liquidity conditions supported by accommodative monetary policies.
Marcelo Assalin is head of emerging market debt at NN Investment Partners
• Hard currency sovereign bonds and selected corporate credit preferred
• Strong growth dynamics, declining fiscal borrowing needs and support from development partners will support credit metrics
• Investors must remain selective to avoid country-specific risks
• Resilient US economy operating beyond full employment may generate inflationary pressures