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EMD risk factors

Which risk factors do you think will prove most material in 2020?

The three risk factors that we think will be most influential are the Fed’s stance, global liquidity and geopolitics.

  1. A more hawkish stance from the US Federal Reserve would challenge our view on some defensive high-carry positions that we have in the portfolio. If this scenario were to materialise, we could protect the portfolio through taking a short position in EM FX.

  2. On liquidity, could we see the environment become more challenging for EM credit given the global monetary and geopolitical backdrop. A more difficult liquidity environment might reprice hard currency spreads to incorporate a higher liquidity premium, which could impact our views in some hard currency credits.

    If this scenario were to materialise, we could express a negative view through taking a short exposure in EM credit, as well as using CDS to reduce our exposure to market beta or express a negative beta view.

  3. On geopolitics, material instability can never be ruled out, especially in the Middle East. If tensions escalate further in the region, which is still a tail risk, there could be profound implications for the Middle East, oil prices and potentially sentiment around the US economy. Russia could emerge as a potential winner from such a situation.

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