EM debt a bright spot

SEVERAL factors have contributed to this year's outperformance in the Asian and emerging markets fixedincome space:

Unlike 2017, there is a less clear macro-theme for 2018. Alpha-generation and country-level dispersion will likely prove a much stronger theme. Indonesia and India are close to, or at the end, of their rate-cutting cycles. Moreover, several markets are starting shallow rate-hiking cycles, such as South Korea, Taiwan and the Philippines.

The bottom line is that the strong tailwinds which drove EM yields markedly lower this year are less pronounced going forward, although yields can continue to grind lower. Therefore, EM yields will likely become more sensitive to idiosyncratic factors. Investors are also more likely to maximise interest income if capital appreciation opportunities aren't as obvious.

Outlook

The growth environment should remain supportive, with India forecast to have the largest yearon- year increase in GDP growth in 2018. The EM inflation outlook also looks benign with inflation remaining within the target range for most countries at the end of next year. In China, we expect circa 6.2 per cent year-on-year GDP growth and continued progress on the reform agenda.

However, there remains risk of volatility coming from micro-stresses in the economy, particularly if they concide with slowing growth and other global factors. This appears to be a continuation of the same environment as 2017 but there are two key differences that investors should take into account in 2018:

Cristiana de Alessi is emerging markets rates portfolio manager at BNP Paribas Asset Management.