Emerging market fixed income – the outlook

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  • Despite a sometimes challenging environment emerging market debt generated strong returns in 2019.
  • All four principal emerging market debt categories generated double-digit returns in 2019, led by hard currency emerging market debt.

2019 saw headlines of looming debt defaults from Argentina to Lebanon. Protests in countries as disparate as Hong Kong and Bolivia raised concerns among investors over investment risk.

Exhibit 1: Returns for the different categories within emerging market fixed income (EMFI) in full year 2019

EMD outlook

Past performance is not indicative of current or future performance. Source: JPMorgan; 2019

In addition, the bonds of several countries including Ecuador, Tajikistan and Zambia now trade, rightly or wrongly, at distressed levels. In short, during a year of strong returns, we saw extreme dispersion at the country level within emerging market debt markets.

Exhibit 2: Hard currency EMFI: Top & bottom performers – full year 2019

EMD outlook hard currency

Past performance is not indicative of current or future performance. Source: JPMorgan; 2019

Exhibit 3: Local currency EMFI: Top and bottom performers – full year 2019

EMD outlook local currency

Past performance is not indicative of current or future performance. Source: JPMorgan; 2019

In 2020 we expect a broadly supportive environment for EMFI investments, albeit with considerable country dispersion

EM sovereign default rates will continue to rise in 2020 with a bunching of risky debt maturities being reached this year. Dispersion is typically a positive dynamic for active managers although it is striking that most active managers underperformed the major EMFI benchmarks in 2019. Choosing the right manager has and will become ever more important, in our view.

We believe our close focus on assessing issuers on the basis of strict environmental, social and governance (ESG) criteria will continue to help protect investors from pitfalls and produce long-term sustainable returns. This, combined with a marriage of top-down asset allocation and bottom-up credit screening, defines our incisive process.

Our forecast for EMFI returns in 2020

EMD outlook forecasts

No assurance can be given that any forecast, target or opinion will materialise. There is no guarantee that the performance objective will be achieved. Source: BNPP AM

Macroeconomic outlook: Expect the strong US/weak EM cycle to reverse in 2020

We see the global cycle as being at an important inflection point now. Over the past few years, we have witnissed a period of stronger US growth amid a downturn in the rest of the world, including emerging markets.

In 2020 we expect this trend finally to reverse, with the US slowing as fiscal stimulus subsides and politics dominate during a contentious general election cycle.

On the other hand, we expect various emerging market economies to start benefitting from considerable monetary – and in some cases fiscal – stimulus, and for growth to rebound from relatively subdued levels.

In addition, as Chinese economic data has continued to soften, we expect policymakers to employ targeted stimulus to support the domestic ec economy, and by extension, the broader Asian and EM complex.

Exhibit 4: Estimated real GDP growth (year-on-year)

EMD outlook growth

Past performance is not indicative of current or future performance. Source: JPMorgan, UBS, Bank of America, Goldman Sachs, Citigroup, Morgan Stanley, BNPP AM; 2019

The key risks to our theme include:

  • Financial sector risks as leverage and imbalances grow in the developed world
  • Inflationary shocks which could force central banks to adopt a more hawkish monetary policy response
  • Re-escalating global trade tensions which could further suppress global trade, disrupt global supply-chains and lead to capital flight out of EM 

Hard currency EMFI to offer stable returns in line with yields

  • Demand side technicals remain supportive as low global yields drive inflows from investors searching for yield
  • Pockets of value remain, especially relative to developed markets, in the non-distressed higher yielding segment
  • Expect EM sovereign default rates to rise from current low levels

While hard currency EMFI will continue to offer good income potential relative to developed markets, higher defaults and valuations near fair value will limit capital appreciation here.

Local currency EMFI offers strong return potential via currency appreciation

  • EM central banks to retain a dovish monetary policy stance on account of benign inflation pressures and low growth 
  • A Federal Reserve on hold should also provide EM central banks with more policy manoeuvrability
  • EM Currencies poised for a rebound in line with growth and investment cycles

In our view, local currency EMFI should benefit both from currency appreciation as well as from local EM bond yields remaining lower for longer. This leads us to believe there are good prospects for strong total returns in 2020.


This article appeared in The Intelligence Report

The Intelligence Report TIR

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Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.

Investors Corner app

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

L. Bryan Carter

Head of Emerging Markets Fixed Income

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