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
March saw heightened volatility as conflict in the Middle East triggered a risk-off shift, putting pressure on EM assets.
After starting the year on a strong note, March was marked by significant volatility after war in the Middle East drove a risk-off move across financial markets. As a result, emerging market (EM) fixed income came under pressure.
Rising inflation forecasts from oil market disruption caused expectations of interest rate cuts to reverse, pushing up global bond yields. US Treasury yields rose across the curve, while the US Federal Reserve adopted a more hawkish tone and revised up its inflation projections. Meanwhile, the US dollar rallied as investors flocked to the safe-haven asset, with EM currencies coming under pressure.
The EM local currency debt market (JPMorgan GBI-EM GD) fell by 5.5% over the month in US dollar terms. EM currencies came under pressure from the stronger US dollar and higher oil prices – net oil-importers and risk-sensitive currencies were most affected. Local bond markets also posted a negative return, especially Turkey and South Africa, as increased geopolitical risk led to foreign investor outflows.
The EM sovereign hard currency debt market (JPMorgan EMBI GD) fell 3.3%. Both the high-yield and investment-grade segments lost ground from both the sharp rise in US Treasury yields and as credit spreads widened amid weaker risk sentiment.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.
