Emerging Market Debt, like the entire fixed income asset class, has had a tough start to 2022.
Even hard currency bonds, as represented by the JP Morgan EMBI Global Diversified Index, have seen YTD returns not experienced since 1995. With 1Q22 completing four consecutive negative quarters - an occurrence which has only happened 3 times since 1993.
Looking further across the EMD spectrum, YTD performance for emerging market local sovereign bonds, investment grade and high yield corporate credit have all registered double digit negative returns.
With such results, it is of no surprise that YTD outflows for both local and hard currency bonds are now around the USD mid-teen billions.
The good news is twofold:
- EM Bond Yields are reaching levels where institutional investors are consider re-entering the market. Even frontier country bonds, with 50-60% higher than their hard and local currency emerging market counterparts, are gaining interest.
- And secondly, with the main contributor to the negative performance YTD being the interest rate differential between EM countries and the US. But, as many EM Central Banks pro-actively accelerate their interest rate hikes, real interest rate differentials may soon make EM local markets relatively attractive.
Yet many questions on the outlook for emerging market debt remain. Country specific risks remain elevated. As do lingering COVID concerns and geopolitical risks. And the cheapness of EM currencies is sensitive to the strength of the USD, which is being propelled by a hawkish FED and a risk-off safe-haven attraction.
But as always with Emerging Markets, there will be winners and losers. Selective EM economies and corporates are fundamentally strong and benefiting from rising commodity prices. Whereas for others, the post-COVID normalisation path is still unclear.
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