Emerging Markets

Emerging Markets Debt: Taking a Hard (Currency) Stance

Editorial Staff 25 November 2019

Emerging Markets Debt: Taking a Hard (Currency) Stance

The authors of this article dive into the world of emerging market debt investing.

The following article looks at the case for emerging market debt, and hard currency assets, and comes from Omotunde Lawal, head of emerging markets corporate debt; Dr Ricardo Adrogué, head of global sovereign debt and currencies; and Cem Karacadag, managing director), at Barings, the asset manager.

With geopolitical uncertainties still very much in the back of people's minds, it is easy to see the case for investors to diversify risks consistent with their asset allocation objectives. As the year-end comes into view, this publication notes that some firms are talking about reducing risks exposures, as seen with UBS a few days ago, for example.

The editors of this news service appreciate guest comments and invite responses. As always, we do not necessarily agree with all views of guest writers. If you want to jump into debate, email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com


Emerging market debt performance was muted in Q3, but valuations remain attractive and emerging economies are growing at a measured pace. We continue to favour hard currency assets, which are benefiting from lower rate expectations.

Resilience amid challenging conditions

Performance across emerging markets debt (EMD) asset classes was muted in the third quarter as a number of geopolitical risks continued to unfold across the emerging market landscape. Returns were positive across hard currency emerging market debt asset classes - where emerging market corporates returned 1.55 per cent and emerging market sovereigns returned 1.39 per cent. EM local debt fell by 0.62 per cent, weighed down by local currencies, which fell by 3.72 per cent overall.

Hard currency assets and local rates were buoyed by a sharp fall in US Treasury rates, alongside a dovish US Federal Reserve and European Central Bank.

Argentina front-and-centre
The drop in EM local was impacted by escalating US-China trade tensions, slowing global trade growth, and falling oil prices, which lost 8.7 per cent during the quarter, even after the drone attack on Saudi Arabia’s largest oil storage facility.

Emerging market currencies were mixed - with Turkey and Thailand gaining, while all other local benchmark currencies were negative, led by Argentina and Brazil. Argentina, in particular, was front-and-centre as the country started the process of reorganising its debt. The country fell into technical default following the market’s reaction to the PASO primary presidential election - where President Macri was upstaged by landslide victor Alberto Fernández, and former president Cristina Fernández de Kirchner. Feeling the effects of this acutely, the Argentinian peso fell by 26 per cent during the quarter.

Emerging markets follow the Fed’s lead
The IMF’s second-quarter economic data pointed to a global growth rate of 2 per cent, the slowest rate since the third quarter of 2016. Global inflation was reported at 2 per cent - with emerging market inflation at 3.8 per cent. Global trade growth declined to a negative 4.9 per cent, the slowest pace since the first quarter of 2016, influenced by China’s cyclical slowdown and the protracted trade war with the US. Following suit with the Fed, several countries cut rates during the quarter - including a 0.5 per cent cut by China to the reserve requirement; a 0.25 per cent cut by South Korea, Russia, Thailand and Mexico; and a 0.35 per cent cut by India.

Generally speaking, we remain positive on emerging market debt overall, as we believe valuations continue to look attractive and EMs continue to grow at a measured pace. However, we are mindful of persistent risks - such as the ongoing trade negotiations between the US and China, increasing Persian Gulf tensions, and large market swings in currencies, interest rates and bond prices.

Opportunities: We continue to favour hard currency assets, and believe sovereign and corporate bonds remain the most attractive in the current environment, benefiting from lower rate expectations and healthy economic growth.

Local rates remain attractive, in our view, as governments continue to follow fiscal consolidation programmes while trying to stimulate their economies. On a regional level, Latin America continues to provide some of the most attractive investment opportunities from a risk/return perspective, and we also find value in certain Eastern European hard currency high yield issuers.

Overall, we favour countries with the flexibility to adjust to an uncertain future, given the fluctuations in commodities, core interest rates and developed market growth.

Beyond the Index: Across emerging markets, we are seeing some of the most attractive opportunities beyond traditional indexes. For example, when it comes to sovereign debt, we are finding opportunities in countries like Albania and Macedonia, even though those countries are not included in the index today. We are also comfortable taking zero exposure to countries that we don’t believe have a  favourable risk-reward profile, even if they are included in the index. For instance, we think the political risks are currently underpriced in the Gulf Cooperation Council (GCC) countries, and as a result have virtually no exposure to the region - a sizeable view to take versus the index.

Risks: The key risks for the remainder of the year continue to lie in US trade policy and its potential impact on global trade, as well as heightened tensions in the Middle East. Despite dovish central banks and upcoming trade meetings between the US and China, we do not see a strong catalyst for overall currency appreciation at this time. Investors must be discerning with respect to currency selection, given the effect of lower rates on foreign exchange - as well as emerging market countries’ practices of using their currencies as shock absorbers, and as a means of making exports more competitive on the global market to boost economic activity.

Selectivity: We remain optimistic given the current backdrop for EMs, which has improved markedly since December 2018, and is very much supported by dovish central banks. But rigorous bottom up-analysis, security selection, active management and risk mitigation remain paramount.

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