Emerging Markets Year-End Update

Monthly Commentary

December 17, 2019

We remain cautiously optimistic about the outlook for Emerging Markets (EM) debt as we head into 2020. We believe global growth will improve slightly year-over-year in 2020 and is more likely to overshoot than undershoot, as indicated by the green shoots1 already appearing in the European Union (EU) and Japan, and economic indicators starting to surprise on the upside in a number of EM economies, especially in Latin America. We see EM growth outpacing developed markets growth in 2020, which historically has driven flows into the asset class.

Still, we believe the major Central Banks will remain cautious and biased toward easing. This more accommodative policy stance could extend the current low rate environment into the medium term, which we believe will continue to drive inflows into higher-yielding asset classes, like Emerging Markets debt. This environment should also provide EM central banks the policy space to enact pro-growth measures as needed, especially as inflation remains benign.

Geopolitical risks will likely remain elevated and could complicate the outlook for 2020, but we see the potential for improvements in one or more of the more important geopolitical issues, such as Brexit and/or the U.S./China trade war. Volatility related to the U.S. election could begin to affect markets as early as the second quarter and will certainly have an impact in the second half of the year in our view.

Should we see signs of a broader turnaround in global growth and/or a de-escalation in the larger geopolitical risks, within the Emerging markets debt spectrum, local currency could present an interesting opportunity in 2020, especially as EMFX currently trades near historic lows relative to the dollar. In the interim, we believe Emerging Markets debt returns will be largely driven by carry.

1 Green shoots is a term used to indicate signs of economic recovery during an economic downturn.

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This material is for general information purposes only and does not constitute an offer to sell, or a solicitation of an offer to buy, any security. TCW, its officers, directors, employees or clients may have positions in securities or investments mentioned in this publication, which positions may change at any time, without notice. While the information and statistical data contained herein are based on sources believed to be reliable, we do not represent that it is accurate and should not be relied on as such or be the basis for an investment decision. The information contained herein may include preliminary information and/or "forward-looking statements." Due to numerous factors, actual events may differ substantially from those presented. TCW assumes no duty to update any forward-looking statements or opinions in this document. Any opinions expressed herein are current only as of the time made and are subject to change without notice. Past performance is no guarantee of future results. © 2019 TCW