EM debt rally cools in Q3

15 October 2019

Local currency emerging market (EM) debt has cooled off in the third quarter while external, dollar-denominated debt, has produced small gains, according to Eaton Vance.

Local currency EM debt, as measured by the J.P. Morgan GBI-EM Global Diversified Index, fell by 0.79% due to the strong US dollar and negative sentiment around Argentina’s election.

At the same time, sovereign credit, represented by the J.P. Morgan EMBI Global Diversified Index (EMBI), gained 1.51% and corporate credit, represented by J.P. Morgan CEMBI Broad Diversified Index, gained 1.66%.

“The interest-rate rally of 2019 continued in the third quarter, recording the best year-to-date performance by this risk factor in nearly a decade,” the firm said.

“This rally has left valuations for many countries looking rich, while risks to global growth have risen. However, some countries, particularly higher yielding ones, continue to look cheap.”

Further to that, foreign exchange (FX) performance was quite weak in the quarter, led by the Argentinian peso.

As far as EM corporates was concerned, apart from negative situations in Argentina and Asia high yield, Eaton Vance said there was steady fundamental improvements elsewhere in the corporate sector, particularly in Brazil, Ukraine, Russia and Turkey.

The external environment continued to be supportive through commodity prices is a particular risk for EM corporates.

“Investing involves risk including the risk of loss. In emerging market countries, the risks may be more significant in regards to sensitivity to stock market volatility, adverse market, economic, political, regulatory, geopolitical and other conditions,” the firm said.



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