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Capital IdeasTM

Investment insights from Capital Group

Categories
Fixed Income
EMD outlook for 2023: local currency yields offer protection in volatile conditions
Kirstie Spence
Portfolio Manager
Harry Phinney
Fixed Income Investment Director
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

chart1 EMD

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

High income with diversification on multiple levels

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Kirstie Spence is a fixed income portfolio manager with 28 years of investment industry experience. She holds a master's degree with honours in German and international relations from the University of St. Andrews, Scotland.

Harry Phinney is a fixed income investment director with 17 years of industry experience. He holds an MBA in international business from Northeastern University, a master's degree in applied statistics and financial mathematics from Columbia University and a bachelor's degree in international political economy from Northeastern University.

Learn more about
Fixed Income
Emerging Markets
Market Volatility
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Capital Group UK – Global High Income Opportunities​

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RELATED INSIGHTS

Past results are not predictive of results in future periods. It is not possible to invest directly in an index, which is unmanaged. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.

Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.