Emerging Market Debt Market Commentary November

EM debt (in USD terms) enjoyed positive momentum in November, boosted by two major events: the outcome of the US elections and positive vaccine news. The change in US administration could mark a structural shift for US engagement with a number of EM countries and a return to multilateralism. Meanwhile, the discovery of effective vaccines is expected to drive a rebound in economic growth. Both hard currency and local currency debt saw healthy inflows in the month of November, underpinned by the risk-on mood, strong returns and excess liquidity and the chase for yield.

Local Currency Market Highlights

EM Local Currency debt returned +5.49% in US dollar terms in November, as measured by the JP Morgan GBI-EM Global Diversified Index. The FX component of return was by far the key driver of return during the month, though price and interest return also contributed positively. EM FX was boosted by the risk-on rally as well as by the continued US dollar weakness, with the DXY index down -2.31% over the month.

Turkey performed best, returning 13.8% and contributing +28 bps to index returns amid a supportive market backdrop. The country witnessed a rally in its currency (+7.2%) as Turkey’s central bank took a major step of returning to a conventional monetary policy by tightening the interest rate to 15% from 10.25%. In addition, with the lifting of most virus-related restrictions in the third quarter, domestic tourism gained pace.

Colombia was among the best performers in returning +9.4% over the month and contributing +52 bps to index returns. Colombian assets and particularly the peso benefitted from an economic rebound after the government eased lockdown measures.

South Africa returned 8.5% over the month and was the second largest contributor to index returns (64 bps). Even though Moody’s and Fitch downgraded South Africa’s rating to Ba1 and BB- respectively due to worsening fiscal outlook, high beta South African local rates and FX benefited from the risk-on rally in November. South African assets were further boosted by economic and business confidence recovery after the easing of lockdown restrictions amid a relatively stable rate of coronavirus infections. Against this backdrop, the country’s central bank kept its benchmark rate at 3.5%

Mexico and Brazil returned +8.0% and 7.6% respectively, and were the largest contributors to index return (+77 bps and +64 bps respectively). Mexican assets were supported by the sharpest economic expansion for at least three decades with Q3 GDP adding 12.1% from the previous quarter. Despite the sharp rebound however, Mexico’s central bank still expects the economy to shrink 8.9% this year in the worst economic downturn the country has experienced since the Great Depression. In another boost to Mexican assets this month, the country also posted a record trade surplus on the back of strong exports to the US combined with weak internal demand. This was particularly good news for the Mexican peso, which was the main driver of performance. Meanwhile, Banxico paused its rate cutting cycle as it awaited confirmation of a slowdown in inflation