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EMD outlook for 2023: local currency yields offer protection in volatile conditions
Kirstie Spence
Harry Phinney
December 1, 2022
Global factors weighing on emerging market debt (EMD) in 2022 look likely to continue in 2023, with three main driving forces within this: tighter financial conditions led by the US, a stronger US dollar and weak global growth.
Despite this backdrop, however, high starting yields within EM local currency bonds could help offset subsequent price volatility, while negative outcomes appear to be priced in within some areas of hard currency debt. In this piece, Kirstie Spence and Harry Phinney look at EMD’s prospects for the next year, weighting the opportunities and challenges.
Within local currency bonds, we prefer to extend duration in Latin American countries that have hiked interest rates early and are starting to see opportunities within Europe. On the hard currency side, we favour a meaningful positive carry through idiosyncratic, high-yielding sovereign and select corporate issuers.
EM real yields have offered a 2-4% pick up over US
EM real yield minus US real yields
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Past results are not a guarantee of future results.
As at 31 October 2022. EM represented by JPMorgan GBI-EM Global Diversified. EM real yields minus US real yields (10-year yields). Source: Bloomberg
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