Chapters
Market background
Despite the US Treasury market sell-off, the emerging market (EM) fixed income asset class delivered positive returns over the month. High-yield assets outperformed lower-risk parts of the market, reflecting an improvement in risk appetite among investors.
May was a pivotal month for the US Treasury market, with a credit-rating downgrade underscoring broader concerns around US public finances. While market participants welcomed signs of easing trade tensions with China, fiscal concerns were front of mind, given the prospect of continued tax cuts and rising debt levels. This, together with the mid-month downgrade from Moody’s – moving the US’s credit rating to Aa1 from Aaa – drove yields higher across the Treasury curve. On the monetary policy front, the US Federal Reserve kept rates on hold as expected, with commentary from Fed Chair Jerome Powell focusing on the uncertain growth and inflation outlook.
The EM local currency debt market (JP Morgan GBI-EM) gained 1.4% over the month, helped by a combination of currency strengthening and bond market moves. South Africa's bond market benefited from a 25bps rate cut by the SARB, as well as soft inflation data and a downward revision to economic growth. In Nigeria, the currency benefited from increased flows relating to the higher oil price; the country's assets were also boosted from a credit-rating upgrade (to B3) by Moody's, which cited fiscal and external account improvements. In contrast, the Romanian leu was a notable underperformer following significant outflows amid a volatile political backdrop.
The hard currency sovereign debt market (JP Morgan EMBI) delivered a positive return of 1.1% in May, with the high-yield market (2.3%) significantly outperforming investment-grade bonds (-0.1%). In particular, African markets performed well thanks to increased risk appetite among investors. A stronger currency and increased reserves boosted investor sentiment in Ghana, helping the country's bond market. Elsewhere, sovereign bonds in Pakistan benefited from easing geopolitical tensions with India.
General risks. The value of investments, and any income generated from them, can fall as well as rise. Where charges are taken from capital, this may constrain future growth. Past performance is not a reliable indicator of future results. If any currency differs from the investor's home currency, returns may increase or decrease as a result of currency fluctuations. Investment objectives and performance targets are subject to change and may not necessarily be achieved, losses may be made. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.
Specific risks. Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.
