Right place, right time: EM local currency debt today
With global portfolios in flux, EM local currency debt deserves a second look. A decade-long structural evolution has reshaped the market and enhanced its investment appeal.
Chapters
01
Market background02
Top-down views and outlook03
Africa04
Asia05
Latin America06
Central and Eastern Europe, Middle East and South Africa07
EM corporate highlights01
Market background
Rounding off a strong first half of the year, the emerging market (EM) fixed income asset class continued to show its resilience in June. Improved appetite for risk boosted high-yield debt markets, while ongoing weakness in the US dollar supported EM currencies.
Emerging market (EM) fixed income continued to show its resilience in June, as reflected in positive returns across the asset class.
In the US, Treasury yields retreated as several members of the Federal Open Markets Committee (FOMC) adopted a more dovish tone – suggesting they would support an interest rate cut as early as July if inflation were to remain subdued, with downside risks to the labour market building. However, this appears to remain a minority view – US Federal Reserve chair Powell continued to reiterate a 'wait and see' approach as tariff-related inflation is still expected to emerge over the summer. Nonetheless, by month-end, markets were pricing in around 65bps of rate cuts by the end of this year, with a September rate cut seen as increasingly likely.
Turning to emerging markets, the local debt market (JPMorgan GBI-EM GD) returned 2.8% in US dollar terms, taking year-to-date returns to 12.3%. This was led by EM currencies, notably in Latin America and Eastern Europe, with currencies boosted by the broader weakness in the US dollar. Local rates markets also made gains, helped by markets such as Brazil and Turkey.
In the hard currency space, the sovereign market (JPMorgan EMBI GD) rose 2.4%, with the high-yield segment (2.8%) outperforming investment-grade debt (2.0%), as credit spreads tightened in the former on improved appetite for risk. This took year-to-date returns to 5.6%. African and Latin American markets led index returns, with Ecuador and Angola both at the top of the index.
In the corporate market, the JPMorgan CEMBI BD returned 1.4%, with high-yield and investment-grade both contributing to this. Year-to-date returns are now at 4.0%.
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.
