Yields across government bond markets rose in October, resulting in emerging market (EM) fixed income posting negative total returns. Data pointing to resilience in the US labour market and improving consumer confidence led to the market pricing out several interest rate cuts from the Federal Reserve. This drove up US Treasury yields and caused the US dollar to strengthen – weighing on EM currency (EM FX) markets, particularly in Asia and Latin America. Sovereign bond yields also rose in Europe, although not as sharply as in the US. This was against the backdrop of the European Central Bank turning more dovish and reducing rates by 25bps, the first back-to-back cut in 13 years.

Against this backdrop, it was a weaker month for the EM debt asset class. On the local currency side, the JP Morgan GBI-EM GD fell by 4.6%, mostly driven by EM FX moves. Most index constituents posted negative returns, with exceptions to be found in some smaller markets such as Nigeria, where continued progress on currency reforms boosted the currency.

Turning to the hard currency market, following a strong third quarter, the JP Morgan EMBI GD index declined by 1.7%. This was primarily driven by investment-grade markets, which are more sensitive to rises in US Treasury yields. Returns were negative across regions, with some exceptions such as Sri Lanka – where bonds rallied after the country reached an agreement with the IMF on restructuring terms of its foreign currency debt.

Top-down positioning at the end of October 2024

For illustrative purposes only. For further information on the investment process, please see the important information section.

From a top-down perspective, we reduced our overall beta targets in October ahead of the US election as we thought it prudent to take off some risk and lock in positive performance given the unpredictability of the outcome. However, we retain bottom-up risk in certain positions, and remain positive on the asset class overall. The front-loading of interest rate cuts from the Fed, reduced recession risks for the US economy, and broader fundamental improvements within EM economies continue to support our constructive medium-term view.

Regarding local rates, we remain constructive on a long-term basis: a broad softening of inflation across EM economies means that real (inflation-adjusted) yields remain attractive, which is a key driver of long-term returns. Rate cutting cycles have further room to go, and the overall trajectory of Fed policy, as well as dovish commentary, gives us increased confidence that EM economies have the ability to continue cutting rates. Given the recent strength in local currency asset performance and ahead of the election, which pose key risks to tariffs (with potential negative impact on EM FX) and fiscal spending (with potential negative impact on US yields), we have reduced our top-down target in local rates and EM FX to neutral.

In EM hard currency, our top-down target remains overweight as the recent front-loading of interest rate cuts by the Fed should be supportive for higher-yielding EM bond markets in the short term, and we remain constructive on idiosyncratic countries with yield-cushion expected to weather potential election-related volatility.

Outlook

The global economy showed signs of slowing in September, with a cooling US labour market and weakening manufacturing sector allowing the Fed to cut interest rates by 50bps. However, subsequent stronger-than-expected labour-market (and other economic) data, combined with cautious commentary from Fed Chair Powell, has caused market participants to reduce the extent of expected rate cuts over coming months. Additionally, China’s stimulus announcement has boosted sentiment on the country’s longer-term growth, consumption and investment potential, with possible spillover to the broader EM universe. That said, our base case expectation is that the Chinese stimulus announced thus far will not materially impact the trajectory of global growth or inflation.

While financial markets are likely to remain volatile, we maintain a positive medium-term outlook for returns of the EM debt asset class. Many EM economies have solid fundamental foundations, and the more fragile economies continue to receive plenty of support from the IMF and other multilaterals. EM bond market valuations look attractive – with some markets still pricing in significantly more risk than we believe is justified.

The government in Egypt announced it is seeking to renegotiate some of the key elements of its IMF programme – namely, to slow the pace of both its privatisation programme and the removal of fuel subsidies. Egypt’s authorities raised fuel prices in October but stated that this would be the last increase for six months. The managing director of the IMF is set to visit Egypt for discussions around these matters; although investors will need to monitor reform commitment, thus far Egypt’s bond market has not reacted meaningfully. In macro news, month-on-month inflation was high in September, but underlying momentum remains on a downward trend, and we believe next year's disinflation path is still on track. Rate cuts are still expected to start in 2025.

In Kenya, the IMF approved the 7th and 8th review of the Extended Fund Facility and Extended Credit Facility, as well as concluding its review of the Resilience and Sustainability Facility Arrangement. This triggered a disbursement of US$600 million, improving market sentiment and causing the shilling to appreciate. In additional positive news, the constitutional court did not block the 2023 Finance Act as some had feared. This further boosted sentiment as it ultimately paves the way for the recent fiscal reforms to be implemented. In addition, remittance data continued to be strong, while inflation is now just 2.7% year-on-year, allowing the central bank cut rates by 75 basis points (bps), which was more than expected.

The government in Senegal released its revised fiscal figures, which were much worse than had been previously disclosed. The country is now running a 10% budget deficit (5.5% previously), and debt-to-GDP is now 76% (65% previously). As a result, the government needs to renegotiate its IMF deal, a process that is likely to begin in Q1 2025. The country’s hard currency bonds underperformed, with spreads widening on the news.

Ghana exited its default status over the month after the final stages of the hard currency debt restructuring were completed, and the new bonds were issued. This allowed payments to be made to bondholders.

There was continued progress on foreign exchange reforms in Nigeria, and a US$1 billion foreign portfolio inflow boosted sentiment and the naira. The ramp up in oil refineries has allowed the government to reduce its fuel subsidies, which is also decreasing domestic demand for US dollars.

Inflation in Zambia continues to be elevated at 15.7%, with currency weakness still feeding through into the year-on-year rate. Food prices also rose. Although the drought has continued to weigh on economic growth, copper production has now stabilised, and recently announced investments into the sector should provide a boost to the economy.

In Angola, it was reported that the government is talking to the IMF about a possible new deal, which will be key to monitor. Inflation is still very high at 30%, which continues to weigh on the FX rate, resulting in the central bank intervening more aggressively in the currency market.

The budget deficit was below the government’s target in Uganda. However, authorities have reengaged with the World Bank as they look for more funding. Inflation has fallen to 2.9% year-on-year, and at the time of writing, local bonds were yielding over 16%, making real rates very high.

Despite the rise in US Treasury yields, monetary policymakers in several Asian economies cut interest rates. These included the central banks of Thailand and the Philippines. In India and Indonesia, rates were kept on hold, but in the former central-bank rhetoric shifted from being hawkish to a more neutral stance. The region’s technology exports were strong, contrasting with average performance in other sectors. PMIs in the region were stable to slightly weaker over the month.

After the excitement surrounding September’s policy announcements in China, October was a much quieter month as investors digested the long-awaited raft of stimulus measures. Given nothing substantially new was announced in October, our view remains that the policies announced so far are not sufficient to change China’s overall growth trajectory. We expect more fiscal policy details to be laid out following the next National People’s Congress (NPC) Standing Committee in early November, which should give us a more complete picture of the overall stimulus package. That said, data prints in October have been mostly positive: sales of automotives and white goods improved, helped by the consumer goods trade-in programme; Q3 GDP growth was slightly better than expected (4.6% vs 4.5% expected); inflation remains soft; and both retail sales and industrial production improved. The exception was trade-balance data, which surprised to the downside. Data continues to improve in some areas of the property market, such as tier 1 cities and in primary markets, but outside of this, the sector’s outlook remains weak.

Economic growth data remained strong in India, and the central bank kept rates on hold at 6.5% as expected. Given the continued improving trend in inflation, the forward guidance from the Reserve Bank of India changed from a hawkish stance to a more neutral one, indicating flexibility to cut interest rates if needed.

Data in South Korea continued to be disappointing. GDP growth surprised to the downside, with net exports dragging, but domestic demand improved. Following this, the central bank revised its growth forecast down for 2024 to 2.2%-2.3% (2.4% previously). On a similar note, the trade surplus halved over the month – export growth continued its monthly decline, and imports rose. Inflation data was soft, driven by slowing food and energy prices. Lastly, it was confirmed that Korean Treasury bonds will be included in the FTSE’s World Government Bond Index (WGBI) from November 2025.

Bank Indonesia held interest rates at 6.0%, citing concerns about the impact of a stronger US dollar. October saw some positive data prints, with softer headline inflation and a stronger trade surplus. On the political side, following the inauguration of the new president, the country swore in the largest cabinet in decades. The finance minister and economy minister have both retained their positions, which was a positive surprise, but the market reaction was limited.

In the Philippines, the central bank reduced interest rates by 25bps to 6.0% and signalled that there is room for further cuts. Trade-balance data for October still shows a substantial trade deficit of US$4.4 billion.

Data out of Taiwan continued its strong run: industrial production growth remained in double digits, and GDP growth data for Q3 was reported at 4.0% (vs 3.4% expected). In addition, Taiwan Semiconductor Manufacturing Company reported strong earnings, as demand for its AI-related microchips continued.

Political uncertainty surrounding Sri Lanka’s new president, Anura Kamara Dissanayake (AKD), eased somewhat after the Ministry of Finance reached an agreement with the IMF on the terms of the country’s foreign currency debt restructuring. The market took this news positively, and Sri Lanka’s hard currency bonds rallied. National elections have been scheduled for November as AKD’s party won only three seats, making it difficult to implement legislation; the outlook remains unclear until a functioning government has been installed.

Bank of Thailand cut interest rates, going against market expectations of no change, however we believe this is more of an “adjustment” cut rather than the start of a full cutting cycle. Weakness in exports weighed on the trade balance, and year-on-year imports were very strong (10% vs 5.7% expected).

Singapore’s central bank sounded slightly more dovish, although it retained its policy stance on the modest appreciation path for the currency.

Malaysia’s 2025 budget was announced mid-month and yielded no real surprises. Next year’s petrol prices will be adjusted via a reduction in fuel subsidies, but this will happen later in the year than previously anticipated.

In Argentina, President Milei’s spending reforms continued to feed through to a strong fiscal surplus. Attempts to overturn a presidential veto of legislation to increase spending on universities failed, further strengthening the fiscal outlook. Manufacturing activity for September was better than expected, and appears to have bottomed. All of this helped Argentina’s hard currency bonds to perform well.

In contrast, in Brazil, concerns around the country’s fiscal balance continued to weigh on sentiment, causing the currency to weaken over the month. More positively, Moody's upgraded Brazil’s credit rating to BB+, and data for September showed a higher trade surplus than expected. Turning to inflation, headline and core measures were both lower than expected, although the headline number still rose to 4.4% - very close to the upper band of the central bank’s target of 4.5%. The next central bank governor due to take office next year was confirmed as Gabriel Galípolo, as predicted.

The Central Bank of Chile cut interest rates by 25bps, in line with expectations. The inflation print was below market expectations, showing almost no change month-on-month, primarily driven by lower food and energy prices. Additionally, trade data was positive, with a larger-than-expected surplus. S&P raised Chile's outlook from negative to stable, maintaining its credit rating of A.

Following the inauguration of Mexico’s new president, Claudia Sheinbaum, the government passed an energy reform bill which changes the legal status of state-owned energy firm, Pemex. The upshot is that the sovereign will be able to provide more direct support to Pemex, and a rating upgrade for Pemex could follow. Encouraging data prints included a fall in the unemployment rate and lower-than-expected inflation, but economic growth remains weak. Additionally, market confidence was dented by increasing expectations of a Trump win in the US election, which materialised in early November.

Peru’s economy remained on a disinflationary path; September inflation data was lower than expected and well within the central bank’s target range for the seventh consecutive month.

In Colombia, the central bank cut rates by 50bps, with three members voting this while two voted for a 75bps cut. The government proposed a de-centralisation reform bill that would enable increased fiscal power to local states. This could have a rising fiscal cost over time, and the local bond market weakened on the news. Furthermore, headlines around President Petro breaching spending limits on the electoral campaign increased political risk.

The severe drought continued to impact Ecuador’s economic growth, with daily electricity blackouts ongoing. Separately, the Inter-American Development Bank (IADB) approved a US$150 million loan to the country to help the fight against organised crime.

The government in El Salvador announced that it will enter another debt buy-back exercise to smooth out upcoming maturities. In addition, the government presented its budget for 2025, which appears to be market-friendly overall, with 9% less spending versus 2024 levels.

Total Energies confirmed its final investment decision in a large oil field off the coast of Suriname. This should prove transformative for the small economy as it will generate strong revenue and increased investment.

Growth indicators in Poland continued to disappoint, especially in retail sales and industry construction for September, although major floods could be partly to blame. The National Bank of Poland kept rates on hold as expected at 5.75%, but added a slight dovish tilt to its language. The main takeaway for investors from the recently announced supplementary budget is that local bond issuance is likely to rise slightly this year and next.

Inflation was lower than expected in Hungary, especially among services, which had previously been sticky. The National Bank of Hungary left rates on hold as expected, and continued with its hawkish guidance throughout the month, including at the IMF meetings in Washington. This reflects the central bank’s concerns over currency weakness. However, economic growth is falling, with Q3 the second consecutive quarter of negative growth; this, combined with falling inflation and a weaker currency, puts the central bank in a difficult position.

Economic growth in Czechia remained weak but showed signs of stabilising, with retail sales and industrial production both better than expected. While consumer confidence was stronger than expected, business confidence disappointed. GDP data for Q3 showed an increase from Q2, at 1.3% year-on-year, although this was slightly weaker than expected. Inflation was slightly higher than expected, and the central bank governor made comments suggesting that the bank will cut rates cautiously.

In Romania, the fiscal deficit continued to deteriorate and looks set to reach around 8% of GDP this year. More positively, retail sales data were stronger than expected. The central bank kept rates on hold at 6.5%, as expected.

Serbia’s rating was upgraded by S&P, marking the first time the country has been rated investment grade.

Economic data in Turkey showed a continued slowdown in growth given tight monetary conditions. While the economy continues to decelerate, the current account balance recorded a surplus in August, boosted by tourism, and FX reserves have continued to increase driven by locals selling US dollars for lira. However, on the inflation side, the CPI print for September was worse than expected at 3%. This was led by core inflation, possibly signalling that rates will need to remain higher for longer and postponing the first rate cut into 2025. For context, year-on-year inflation is now at 49.4%, while the policy rate is at 50%.

In South Africa, the government announced its medium-term budget, which will see the budget deficit increasing slightly. October also saw the Government of National Unity reach its 100-day milestone.

Tensions in the Middle East remain high, but cooled somewhat over the month, with the oil price remaining volatile across October.

After several months of positive total returns, the EM corporate debt market (JP Morgan CEMBI) lost ground in October. However, the index is still up 7.6% year to date. Within the index, high-yield debt (-0.2%) outperformed investment-grade bonds (-1.3%) over the month.

Data pointing to resilience in the US labour market and improving consumer confidence led to the market pricing out several interest rate cuts from the Federal Reserve. This drove a sell-off in the US Treasury market, which weighed on investment-grade bond markets. However, the stronger macroeconomic outlook resulted in credit spreads tightening across the EM corporate debt market, partially offsetting the negative impact of US Treasury yield moves.

Most sectors and countries in the index ended the month down, with the exception of Ukraine and Argentina, which both continued to perform well. Primary (new bond issue) markets continued to be active over the month, defying expectations of a slowdown ahead of the US election, with the share of issuance from high-yield companies increasing significantly.