Insights

Emerging Market Debt Commentary: August 2022



Emerging market debt (in USD terms) recorded a modestly negative move overall in August. Worries related to slowing global activity, hawkish central bank policies amid continued elevated headline inflation, and a significant surge in European power prices outweighed the positive sentiment seen early in the month. We see some technical anchors, particularly in EM hard currency (HC) given depressed valuations, generous risk premia and a tentative turn in flows — there were positive flows of +$1.4 billion in HC in August compared to -$2.7 billion in local currency (LC) flows, according to JP Morgan. However, near-term uncertainty remains high and the outlook has become more fragile due to a number of external shocks and idiosyncratic factors.

EM local currency debt returned -0.14% in USD terms in August, as measured by the JP Morgan GBI-EM Global Diversified Index. Differentials in performance between countries have generally been related to commodity exposures, inflation expectations, and vulnerability to geopolitical risks. Latin American (LatAm) countries have held up comparatively well as growth has proved resilient in the region amid robust domestic demand and positive terms of trade — a notable contrast with the experience of much of the rest of the world. Meanwhile, in the Central and Eastern Europe region (ex-Turkey), energy dependence on Russia has weighed heavily on performance.

EM hard currency (HC) sovereign debt delivered a return of -0.94% in August, as measured by the JP Morgan EMBI Global Diversified Index. Spreads tightened by 31bps over the month, but a sell-off in underlying rates eroded all spread returns. A volatile month saw markets moving away from expectations of a more dovish US Federal Reserve to repricing for a more hawkish stance emerging from the central bank’s annual Jackson Hole Economic Symposium. Weaker global activity data, increasing energy risks in Europe, and seasonally-low liquidity levels contributed to spreads hardening from the middle of the month, despite supportive commodity prices.


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