Emerging Market Debt Indicator November 2023
Our EM Debt team provides an update across the investment universe and shares the latest outlook and current top-down positioning.
Market background
August was a volatile month for financial markets after minutes from the US Federal Reserve’s July meeting and a raft of stronger US economic data pointed to the potential need for further policy tightening. Given the moves in US yields and the resultant US dollar strengthening, EM fixed income and currencies weakened over August.
Africa
Ghana continued to make progress on its local debt restructuring, while the central bank in Zambia hiked rates by 50bps to 10%, as currency pressure is expected to continue to weigh on inflation. There was also political turmoil in Gabon, with a military coup taking control of the country and establishing a transitional government.
Asia
It was another China-centric month in Asia, with sentiment towards the country remaining weak overall and spilling over to weigh on many currencies in the region. However, post month-end, the announcement of nationwide support measures boosted sentiment somewhat. After months of uncertainty, a prime minister was finally appointed in Thailand.
Latin America
The Central Bank of Brazil started to cut rates (by 50bps), a slightly bigger cut than market expectations. In contrast, central banks in both Mexico and Colombia kept rates on hold. Brazil’s President Lula da Silva’s proposed fiscal framework was approved by the lower house. Argentina and the IMF reached a deal to devalue the currency to unlock the next tranche of IMF financing.
Central and Eastern Europe (CEE)
Economic activity data (mainly PMIs) remained at subdued levels in the region, with downside surprises notably in Poland. While economic data remains broadly weak, it is no longer surprising consistently to the downside. Similarly, falling inflation came as less of a surprise, and the narrative in the Czech Republic is shifting in the direction of rate cuts.
Rest of Europe, Middle East and Africa (EMEA)
Policymakers in Turkey continued to extend macroprudential measures. Moody’s suggested that if this orthodox policymaking path continues, it could lead to a “positive outlook” rating for the country. But inflation remains troublesome and growth weak. Elsewhere, an improving inflation picture increases the likelihood that the South African Reserve Bank has completed its hiking cycle.
EM corporate debt highlights
EM corporate bonds came under some pressure over August, with the JP Morgan CEMBI BD returning -0.4%. The asset class was impacted by both widening spreads and rising US Treasury yields, with high-yield issuers outperforming investment-grade, helped by its lower interest rate sensitivity.
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.
Specific risks. Emerging market: 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.