Can EMFX take the baton from fixed income – Deutsche Bank

Research Team at Deutsche Bank, suggests that the rotation out of DM into EM has been the main driver of asset pricing this year – favoring EM fixed income.

Key Quotes

“As the business cycle progresses more growth-sensitive asset classes such as FX and equities tend to outperform. The resilience across EMFX during this latest bout of repricing across fixed income suggests that this transition is near.

Given the importance of global inflows, we analyze how fitting in global portfolios EMFX allocations have been –both passively and dynamically.

• We find that two pricing factors alone – namely the USD and carry – account for most of the variation across FX portfolios despite EM’s large diversity.

• We also find that for the entire and for most of the 2003-16 sample, dynamic portfolios build around carry with limits to USD exposure outperform most global and EM asset classes (including G10 FX) and passive FX strategies thus expanding the “frontier”.”