Emerging Markets Face Another `Challenging' Year, JPMorgan Says

  • Local-currency bonds to gain 3.7% after three years of losses
  • Dollar-denominated debt to return as little as 1% next year

While the worst of the emerging-market selloff may be over, a return to the golden days is unlikely, according to JPMorgan Chase & Co., provider of some of the most followed indexes for developing-country fixed income securities.

Local-currency bonds can rise 3.7 percent in 2016, after declining 25 percent over the past three years, the New York-based bank forecasts. Dollar-denominated debt sold by developing-nation countries is likely to return between 1 percent and 3 percent next year.

“Emerging markets will continue to face fundamental challenges in 2016, leading to low single-digit returns in EM fixed income next year,” strategists led by Luis Oganes wrote in a note Tuesday. While the growth outlook is “a bit stronger” next year, it “remains below potential,” according to the report.

Even as an increasing number of strategists are turning less bearish on emerging markets after years of underperformance, few say the assets represent a screaming buy as the dollar strengthens and growth slows in China. UBS AG expects a 3 percent gain in emerging-market stocks next year, compared with an average annual return of more than 20 percent during the decade through 2012.

JPMorgan expects economic growth in developing nations to rise “modestly” at a pace of 3.7 percent, up from 3.4 percent this year, mostly driven by “stabilization” in countries that are mired in recession, including Russia and Brazil.

A buildup in debt will keep the health of emerging-market banks “under scrutiny,” the JPMorgan strategists wrote. Emerging-market currencies will continue depreciating until the second half of 2016, they said.

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