A remarkable calm has descended upon the emerging bond market since the turn of the year. Returns are broadly in line with what can reasonably be expected, given the current yields of indices, with some outperformance for higher-yielding segments. Headwinds from rising core interest rates - evidenced by higher US treasury yields than January levels - were neatly offset by an equal or greater contraction of the risk premium for hard currency bonds across sovereign and corporate markets. Investors thus reaped the reward from the historically attractive starting point for emerging market yields. US dollar-based investors in local currency markets suffered losses, despite a rally in bonds, due to the strengthening greenback.
Figure 1: Emerging Market Debt Asset Class Yields
Source: JP Morgan & ICE Data, as of June 28, 2024. It is not possible to invest directly in an index. See disclosures for index descriptions. Past performance is not indicative of future results.
Despite the overall benign returns, dispersion among countries and credits was wide in the first half of 2024. Partly owed to political events with the electoral calendar stacked the heaviest for a six-month period on record, and partly owed to the advancement of radical reform agendas in several countries, investors were offered many opportunities to express views on how specific events materialized. For example, the unexpected outperformance of the Morena party in Mexico, where the first female president Claudia Sheinbaum will take office backed by a supermajority in Congress later this year, or the equally surprising loss of Narendra Modi’s party’s majority in the Indian parliament were only two of many examples where pollsters, analysts and pundits failed to predict outcomes correctly. However, during the first half of 2024, champions of structural reforms topped the return table. In Argentina, Javier Milei pressed ahead with his radical economic adjustment, buoyed by the passing of a key piece of legislation by the narrowest of margins, while fellow reformer Daniel Noboa in Ecuador also offered rich rewards to investors by tackling some of the most pressing structural problems. In Egypt meanwhile, a transformational investment project (Ras El-Hekma) came with plenty of upfront cash as well as the potential for future growth.
Figure 2: Emerging Market Debt Sovereign Yields
Source: JP Morgan, as of June 28, 2024. It is not possible to invest directly in an index. See disclosures for index descriptions. Past performance is not indicative of future results.
As we enter the second half of 2024, the calendar is less well populated with emerging market elections, only to give way to the cacophony of noise stemming from a US presidential race. A second term in office for Donald Trump could entail an increase in tariffs for emerging market exporters, particularly of manufactured goods, while in the geopolitical sphere, the Republican frontrunner will likely opt for a transactional approach. This could imply a fundamental shift in the current theatres of war in Ukraine and on the Israeli frontlines.
Countries in sovereign default have made significant progress in negotiations with creditors over recent months. The Zambian restructuring offered a blueprint for a new value recovery instrument, where if certain economic success conditions are met, investors will get additional payments. Other restructuring discussions, namely in Sri Lanka and Ghana, are close to agreement while the Ukrainian debt moratorium ends in August. The stated objective by the Ukrainian authorities is to exit the current state of payment deferrals and restructure the sovereign yield curve with lower initial coupons and step-up features, while also including value recovery instruments for the period after war. This would allow the country to re-enter primary markets relatively swiftly once the war is over amid large borrowing needs for reconstruction, providing a benchmark yield curve for private borrowers while offering symbolic coupons during the current state of high uncertainty.
Overall, we are optimistic about the prospects for emerging markets for the remainder of 2024. Resilient growth outcomes, despite early adjustments to policy interest rates across Latin America, Eastern Europe and Africa, and a trickier funding environment show that policymakers were correct in reacting to external threats early. Concerns that countries or corporate issuers might find market access difficult have alleviated with even lowly rated issuers able to borrow from ample pools of capital. Expensive valuations when taken in this context can be justified in many cases, while in our view the outlook for returns looks promising amid a well-established range for emerging market yields.
Figure 3: Emerging Market Debt Yields
Source: JP Morgan, as of June 28, 2024. It is not possible to invest directly in an index. See disclosures for index descriptions. Past performance is not indicative of future results.
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RISKS OF INVESTING IN EMERGING MARKETS
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INDEX DESCRIPTIONS
ICE BofA Liquid U.S. Treasury Index – tracks the performance of USD denominated sovereign debt publicly issued by the US government in its domestic market. Bills, inflation-linked debt and strips are excluded from the Index.
JPMORGAN CEMBI BROAD DIVERSIFIED HIGH YIELD INDEX – JPMorgan CEMBI Broad Diversified High Yield is a sub components of the JPMorgan CEMBI Div Broad Composite Blended Yield Index, which cover the sub investment grade part of this composite index.
JPMORGAN EMBI GLOBAL DIVERSIFIED INDEX ─ JPMorgan EMBI Global Diversified Index is an unmanaged, market-capitalization weighted, total-return index tracking the traded market for US-dollar-denominated Brady bonds, Eurobonds, traded loans, and local market debt instruments issued by sovereign and quasi-sovereign entities.
JPMORGAN GOVERNMENT BOND–EMERGING MARKET INDEX – JPMorgan GBI-EM Global Diversified (GBI-EM) series, launched in June 2005, is the first comprehensive global emerging markets index of EM local government bond debt. There are three root versions of the GBI-EM with a Diversified overlay for each version; GBI-EM Broad / GBI-EM Broad Diversified, the GBI-EM Global / GBI-EM Global and the GBI-EM / GBI-EM Diversified.
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