With inefficiency comes opportunity, according to Franklin Templeton Fixed Income’s Nicholas Hardingham and Robert Nelson. They consider the emerging market debt landscape, and what the remainder of the year could bring for the asset class.

A rally in emerging market debt assets has gained traction following a very difficult period starting from March, which we consider to be one of the worst months in the history of the asset class—on par with the global financial crisis.

The demand, supply and oil shocks that hit the global economy and capital markets were exacerbated in the case of emerging market debt by extreme outflows, which manifested in indiscriminate selling of exchange-traded funds (ETFs).

Macroeconomic factors have mostly driven the rally, along with the US Federal Reserve’s (Fed’s) extraordinary liquidity provision in March that really turned the tide. Some recovery in the price of oil to its present level around US$40 has also played a part in the rally.

We consider liquidity a factor intrinsic to the asset class that contributes to the inefficiency of the market, which thereby creates opportunity. While the general trend since the Fed’s liquidity injection has been a tightening of spreads, helped by a significant improvement in trading conditions, liquidity remains a major factor and its absence has certainly caused significant volatility for individual bonds.

A patient approach is often needed to source bonds at attractive prices. We also like to look for opportunities beyond standard benchmarks to debt instruments which have sufficient liquidity premium priced in.