Two months before its due date, the USD 2.1bn PDVSA bond maturing in April 2017 was trading at 36 cents to the dollar, a sign that Venezuela was about to default. However, against all odds, on April 6th, PDVSA paid and bondholders got their hopes up again. Just two months later, investors renewed their concerns over Venezuela’s ability to pay. Fund managers are swapping their short dated bonds for longer ones and most of them see a debt restructuring as an unavoidable outcome. So what has changed?

Since the Brexit referendum last June, economic fundamentals have defied expectations of a sharp slowdown. Despite considerable policy uncertainty, consumer spending remained buoyant, industrial activity and business investment held up well.

We have taken a positive view on Emerging Market debt for some time. Over the past few months, however, we tempered our enthusiasm as we balanced relatively attractive spreads against the implications of rising protectionism for trade-dependent economies. Market developments, however, are now leading us to change our view.  Valuations have become less attractive, even if our concerns regarding the macroeconomic backdrop for many markets have subsided.