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Emerging Market Debt

Market Commentary: Q1 2024

Emerging market (EM) debt had a cautious start to the quarter, having experienced a strong rally towards the end of 2023. Hopes that the Israel-Hamas war would not be prolonged ebbed, with rising fears of a further escalation weighing on risk sentiment and sending oil prices higher. Inflation continued to soften across major EM economies, with the consumer price index (CPI) data maintaining the downward trend. The broad EM inflation outlook for 2024 continued to be positive, despite the latest spike in commodity prices. EM debt returns were once again impacted by a resilient US economy and market repricing of the timing of the US Federal Reserve’s (Fed) first rate cut. Total returns in Q1 for local currency debt were negative, largely due to the US dollar strength, although the significant contribution from spread returns helped drive positive returns in the hard currency debt space. The US Fed left its overnight federal funds rate target range unchanged in Q1 at 5.25%-to-5.50%.

Evolving expectations around the Fed’s monetary policy stance had mixed implications for EM central banks. In EM Asia, the timing of rate cuts was pushed to later in 2024, with China being a notable exception. The monetary policy approaches of central banks in Latin America (LatAm) have increasingly decoupled from the Fed, with many having commenced cutting rates in 2023. EM central banks in the EMEA region initially lagged their LatAm counterparts, although this policy divergence narrowed as the quarter progressed. In China, a weak growth outlook prevailed due to sluggishness in the property sector and a lack of meaningful growth stimulus. In January, the People's Bank of China (PBoC) announced a reduction in the reserve requirement ratio (RRR) for all banks by 50bps to 10% from February 5, releasing up to 1 trillion yuan ($139.45 billion) of liquidity. China’s local bond yields declined to multi-decade lows in Q1, as the PBoC announced a larger than expected cut in the five-year loan prime rate (reference rate for mortgages) by 25bps to 3.95% in February. The 1-year loan rate was retained at 3.45% throughout the quarter, contrary to market expectations for a rate cut.

Net flows in the quarter were negative for both hard currency and local currency funds, amounting to -$5.7bn and -$4.4bn, respectively (source: JP Morgan).

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