Oct 24, 2022
Senior members of Ninety One’s emerging market (EM) debt investment team went to Washington recently for the annual gathering of economic leaders, finance ministers and central bankers. This is an invaluable forum for investors to gain insights into policymakers’ latest thinking and for getting a broader sense of market sentiment. While there were no major revelations – and the various meetings confirmed the sizeable challenges facing policymakers and investors alike – some notable pockets of positivity came through as we head into year end. Here we outline the key takeaways for EM debt investors; for more detailed country-level comments, please contact your Ninety One client representative.
The tone in Washington was unequivocally bearish. Chief among participants’ concerns were rising global interest rates in response to persistent inflationary pressure and forecasts of a global recession in 2023. Both of these concerns are seen to have their origins and most acute pressure points in the developed world. Recent financial stability concerns in the UK pension system and expectations of a severe European recession next year were regularly floated as prime examples of the current global challenges. EM – outside of eastern Europe – was seen as a point of relative strength.
A message that came across consistently was that the structural challenges facing Europe are deeply entrenched. In particular, the region needs to grapple severe issues around energy security. This is especially prevalent in Germany, but most of the region is impacted and this requires significant investment.
While it was acknowledged that funding challenges are not an issue for the more core EM economies, frontier markets remain (unsurprisingly and understandably) challenged. It was encouraging to hear various senior IMF representatives speaking of a commitment to support these economies through a variety of tools – both established and new/revised. We would note that the huge disparity in political will and/or capacity to enact the fiscal reforms conditional to IMF support necessitates a highly selective approach to investing.
The impact of war in Ukraine remains the dominant focus in the global macro narrative and this is unlikely to change any time soon. Meeting participants spoke of the extensive financing needs in Ukraine increasing the urgency of a resolution to the conflict, while noting a key risk is neither side being willing to give any ground as views become more entrenched. This is driving ongoing uncertainty.
IMF representatives and investors alike recognised that Latin America has led the way on policy orthodoxy this year, both within EM and on the global stage. Most Latin American central bankers report that their economies are functioning as normal and that rate hikes will be effective in bringing down inflation. There is no material change to neutral real rate assumptions relative to the pre-COVID/war period, and consensus is that many markets – including Brazil, Chile and Peru – are now close to the end of their rate-hiking cycles. This confirms our view that there are some attractive opportunities in the region for EM local bond market investors.
All investments carry the risk of capital loss.