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Is the long-term case for emerging market debt still intact?
Kirstie Spence
Koon Chow
March 31, 2023
2022 was a difficult year for fixed income in general, including emerging market debt, amid high inflation and aggressive rate hikes by central banks. While the global backdrop remains a headwind for emerging markets, relatively strong macroeconomic fundamentals in the major EM countries, combined with high starting yields and undervalued exchange rates within local currency debt should provide a buffer to any further volatility. As the chart below shows, two-year returns have been historically positive when yields reach 6.7% or higher.
EM yields may indicate an attractive entry point
Medium term (2-year) forward return when EM yields have peaked above 6.7%
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Past results are not a guarantee of future results.
Data as at 28 February 2023 in USD terms. Yield-to-worst (YTW) and forward returns callouts shown are for 50% JPMorgan EMBI Global Diversified Index / 50% JPMorgan GBI-EM Global Diversified Index. Callout dates for >6.7% yield shown: May 2010, September 2015, December 2015, October 2018, November 2018 and December 2018. Forward returns based on annualised returns. Sources: Bloomberg, JPMorgan, Morningstar
Moreover, it is helpful to remember that while the current volatility in the markets can feel overwhelming, EM debt has developed into a large and diversified universe, with various instruments available to investors to position for various risks. As was the case with the Russia-Ukraine war, investors were able to rotate their portfolios towards less impacted regions and the same can be done around the current banking sector volatility.
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