Emerging Perspectives

EM Debt Q&A: Exploring a more constructive outlook

Following the big drawdowns seen in EM Debt this year, investors are rightly assessing the asset class and considering its future return prospects. Grant Webster addresses some of the key questions posed by EM Debt investors on his recent roadshow.

Aug 23, 2022

2 minutes

Grant Webster
Following the big drawdowns seen in EM Debt this year, investors are rightly assessing the asset class and considering its future return prospects. Grant Webster addresses some of the key questions posed by EM Debt investors on his recent roadshow.

Fast view

  • While not immune to the recent sell-off in global bond markets, EM Debt has shown resilience in the face of multiple headwinds. This speaks to the fundamental strength of EM economies now compared with other sell-offs seen over the past 25 years.
  • Structural improvements in EM include lower levels of dollar debt, free-floating exchange rates and proactive central banks. Stronger balance of payments positions on the back of higher terms of trade should also help EMs cope with a lower growth environment.
  • That said, a ‘tail’ of EM frontier markets appear to have over-borrowed in hard currency and they will face challenges if yields remain elevated and the new issue market closed. While market pricing has already largely reflected some these risks, selectivity is vital.
  • Inflation in EM is showing signs of moderation (with a few notable exceptions) thanks to proactive rate-hiking by EM central banks who began tightening policy much earlier than their developed markets peers and are significantly further through their hiking cycles.
  • Historically, as interest rate-hiking cycles progress to their later stages, investors have underestimated this progress, reflected in undervalued bonds. Bonds then tend to outperform as expectations catch up with reality. Many EMs are now well-placed in this regard.
  • Now at levels not seen since the GFC, EM hard currency yields provide a cushion against volatility. Furthermore, history shows that yield is the dominant driver of bond-market returns, painting a positive picture for return prospects.

Read the paper

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.

General risks

All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.

Authored by

Grant Webster
Portfolio Manager

Important Information

This communication is provided for general information only should not be construed as advice.

All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Ninety One.

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