Are you sure you want to change languages?
The page you are visiting uses a different locale than your saved profile. Do you want to change your locale?
Insights
Continuing to Ride the Emerging Market Debt Bounce-Back
Emerging market debt was one of our investment themes in the Q2 Bond Compass, as we saw scope for a bounce in risk assets as the crisis receded. The Bloomberg Barclays EM Local Currency Liquid Government Bond Index has returned 9.45% since the end of March 2020 in USD unhedged terms.1
Despite this strong bounce, less developed markets have struggled to completely shake off the pandemic. High COVID-19 infection rates in countries such as Brazil continue to cast a shadow over the wider asset class. Nevertheless, emerging markets are diverse and, while some continue to suffer, others have been more effective at containing the outbreak. Indeed, it is this diversity that makes emerging market debt local currency an investment theme for the longer run. We see three key drivers:
- Yields: Yields are relatively attractive in an otherwise lower-for-longer yield environment. Returns solely accounted for by coupons were 2.38% in H1 2020 for the Bloomberg Barclays EM Local Currency Liquid Government Bond Index. The index now has a yield to worst of 3.67% (as of 15 July 2020), low by historical standards but considerably higher than anything available in developed markets outside of high yield bonds.
- Positioning: Investors are still underweight emerging market debt based on State Street Global Markets data released in our upcoming Q3 Bond Compass. Uncertainties around the resurgence of COVID-19 and wider geopolitical issues have left investor holdings in the 22nd percentile at the end Q2 2020, up from the 15th percentile at the end of Q1 2020. As investors look for yield, this long-term underweight may gradually be reduced if markets remain stable and a recovery emerges more solidly.
- Currency valuations: With yields lower, future returns are expected to be led by a rebound in currency. There have been some signs of recovery but the currency basket for the Bloomberg Barclays EM Local Currency Liquid Government Bond Index was over 7.5% undervalued versus the USD, according to calculations from State Street Global Advisors at the end of June 2020.
Focusing on stability and diversification: Looking for the Asian skew
The Bloomberg Barclays EM Local Currency Liquid Government Bond Index has performed well year to date, driven by the high allocations to Asian bonds. This is the only region to generate positive performance, lifted by strong gains from the Philippines, as the central bank there has slashed rates. Moreover, we know that several of the larger countries within this Asian exposure, notably South Korea and China, have been more effective at dealing with COVID-19.
The higher allocation to Asia in the index, relative to other index families (c. 48% versus c. 30% in the JP Morgan EM GBI indices), means a lower exposure to the Americas, where some of the worst performers have been and the pandemic looks harder to control, notably in Brazil. Lastly, exposure to Africa and the Middle East is split between South Africa and Israel. This diversifies away some of the drag from South Africa. So while emerging market debt remains a risk asset, the Bloomberg Barclays EM Local Currency Liquid Government Bond Index has been effective at reducing exposure to some of the poorest performers.
Still looking for currency upside but watching for a weaker USD for EUR-based investors
Overall, risk appetite is returning to the markets and this is feeding through to emerging markets. There are still plenty of risks at play, however, and a cautious approach to entering EM would be to focus on short duration hard currency exposure in the segment. That said, hard currency exposures will not benefit if emerging market FX shows any elastic tendency to spring back to a more favourable level against the USD, thereby suggesting greater potential upside to well diversified local currency-focused exposures.
Indeed, as the markets are more focused on the recovery, the safe haven nature of the USD has gradually been less sought after. It is a key driver of performance for emerging market debt local currency indices, but for non-USD investors it could hinder part of the total performance.
EUR-USD performance has been driven by monetary policy and fiscal support to help economies weather the impacts of the pandemic. As highlighted by Christine Lagarde’s slightly dovish statements at the ECB meeting, recovery speed remains highly uncertain and the ECB will use the full PEPP bond programme purchases. This was in line with market expectations and the EUR strengthened slightly.
The EUR has started its upward trend post the announcement of the EU Pandemic Fund, a topic at stake of the EU meeting over the weekend. Long-term EUR-USD forecasts vary from current levels of 1.14 towards the end of 2020 to 1.17 by the end of 2021, and 1.20 by the end of 2022.s
The annualised cost of hedging the EUR-USD with 1-month forwards was around 3% in December 2019 and is now around 0.8%. The cost of hedging this risk has significantly weakened over the course of the pandemic as the US Federal Reserve cut rates in March 2020 by 150 bps, making the ability to switch between EUR-hedged and unhedged emerging market debt exposure less of a performance concern.
State Street Global Advisors, in partnership with Bloomberg Finance L.P., has introduced a currency-hedging methodology new to the ETF market, hedging only the USD base currency return of the index to EUR. As of today it is the only such ETF with this feature, allowing investors to harness the full potential of emerging market debt local currency in 2020.
Since the end of Q1 2020, and the recovery of emerging market debt local currency indices, this index has helped performance for EUR-based investors to be 9.07%, saving 3.9% against an appreciating EUR-USD.
If longer-term forecasts of a generally weaker dollar play out, this could support emerging market assets. Having the ability to hedge this risk could also greatly help EUR investors.
Figure 1: Rebased index performance in EUR vs. EUR-USD evolution
How to play this theme
Investors can play the emerging market debt theme described above with SPDR ETFs. To learn more about the funds, and to view full performance history, please follow the links below:
SPDR Bloomberg Barclays Emerging Markets Local Bond UCITS ETF (Dist)
SPDR Bloomberg Barclays Emerging Markets Local Bond UCITS ETF (Acc)
SPDR Bloomberg Barclays Emerging Markets Local Bond USD Base CCY Hdg to EUR UCITS ETF (Acc)
Flows
European-Domiciled ETP Segment Flows (Top/Bottom 5, $mn)
European-Domiciled ETP Asset Category Flows ($mn)
Sources: Bloomberg Finance L.P., for the period 9-16 July 2020. Flows are as of date indicated and should not be relied upon as current thereafter.
1 Source: Bloomberg Finance L.P., as of 15 July 2020.
2Source: Bloomberg Finance L.P., as of 16 July 2020.
Marketing Communication. For Professional Client Use Only.
For Investors in Austria: The offering of SPDR ETFs by the Company has been notified to the Financial Markets Authority (FMA) in accordance with section 139 of the Austrian Investment Funds Act. Prospective investors may obtain the current sales Prospectus, the articles of incorporation, the KIID as well as the latest annual and semi-annual report free of charge from State Street Global Advisors GmbH, Brienner Strasse 59, D-80333 Munich. T: +49 (0)89-55878-400. F+49 (0)89-55878-440.
Finland: The offering of funds by the Companies has been notified to the Financial Supervision Authority in accordance with Section 127 of the Act on Common Funds (29.1.1999/48) and by virtue of confirmation from the Financial Supervision Authority the Companies may publicly distribute their Shares in Finland. Certain information and documents that the Companies must publish in Ireland pursuant to applicable Irish law are translated into Finnish and are available for Finnish investors by contacting State Street Custodial Services (Ireland) Limited, 78 Sir John Rogerson’s Quay, Dublin 2, Ireland.
France: This document does not constitute an offer or request to purchase shares in the Companies. Any subscription for shares shall be ade in accordance with the terms and conditions specified in the complete Prospectuses, the KIID, the addenda as well as the Companies’ Supplements. These documents are available from the Company centralising correspondent: State Street Banque S.A., 23-25 rue Delariviere- Lefoullon, 92064 Paris La Defense Cedex or on the French part of the site spdrs.com. The Companies re undertakings for collective investment in transferable securities (UCITS) governed by Irish law and accredited by the Central Bank of Ireland as a UCITS n accordance with European Regulations. European Directive no. 2014/91/ EU dated 23 July 2014 on UCITS, as amended, established common rules pursuant to the cross-border marketing of UCITS with which they duly comply. This common base does not exclude differentiated implementation. This is why a European UCITS can be sold in France even though its activity does not comply with rules identical to those governing the approval of this type of product in France. The offering of these compartments has been notified to the Autorité des Marchés Financiers (AMF) in accordance with article L214- 2-2 of the French Monetary and Financial Code.
Germany: The offering of SPDR ETFs by the Companies has been notified to the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) in accordance with section 312 of the German Investment Act. Prospective investors may obtain the current sales Prospectuses, the articles of incorporation, the KIIDs as well as the latest annual and semiannual report free of charge from State Street Global Advisors GmbH, Brienner Strasse 59, D-80333 Munich. T: +49 (0)89-55878-400.
Ireland: State Street Global Advisors Ireland Limited is regulated by the Central Bank of Ireland. Registered office address 78 Sir John Rogerson’s Quay, Dublin 2. Registered number 145221. T: +353 (0)1 776 3000. F: +353 (0)1 776 3300. Web: ssga.com.
Israel: No action has been taken or will be taken in Israel that would permit a public offering of the Securities or distribution of this sales brochure to the public in Israel. This sales brochure has not been approved by the Israel Securities Authority (the ‘ISA’).
Accordingly, the Securities shall only be sold in Israel to an investor of the type listed in the First Schedule to the Israeli Securities Law, 1978, which has confirmed in writing that it falls within one of the categories listed therein (accompanied by external confirmation where this is required under ISA guidelines), that it is aware of the implications of being considered such an investor and consents thereto, and further that the Securities are being purchased for its own account and not for the purpose of re-sale or distribution.
This sales brochure may not be reproduced or used for any other purpose, nor be furnished to any other person other than those to whom copies have been sent.
Nothing in this sales brochure should be considered investment advice or investment marketing as defined in the Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 1995 (“the Investment Advice Law”). Investors are encouraged to seek competent investment advice from a locally licensed investment advisor prior to making any investment. State Street is not licensed under the Investment Advice Law, nor does it carry the insurance as required of a licensee thereunder.
This sales brochure does not constitute an offer to sell or solicitation of an offer to buy any securities other than the Securities offered hereby, nor does it constitute an offer to sell to or solicitation of an offer to buy from any person or persons in any state or other jurisdiction in which such offer or solicitation would be unlawful, or in which the person making such offer or solicitation is not qualified to do so, or to a person or persons to whom it is unlawful to make such offer or solicitation.
Italy: State Street Global Advisors Ireland Limited Milan Branch (Sede Secondaria di Milano) (“State Street Global Advisors Milan Branch”) is a branch of State Street Global Advisors Ireland Limited, registered in Ireland with company number 145221, authorised and regulated by the Central Bank of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street Global Advisors Milan Branch is registered in Italy with company number 10495250960 - R.E.A. 2535585 and VAT number 10495250960, and its office is located at Via Ferrante Aporti, 10 - 20125 Milano, Italy. Telephone: (+39) 02 32066 100. Facsimile: (+39) 02 32066 155.
Netherlands: This communication is directed at qualified investors within the meaning of Section 2:72 of the Dutch Financial Markets Supervision Act (Wet op het financieel toezicht) as amended. The products and services to which this communication relates are only available to such persons and persons of any other description should not rely on this communication. Distribution of this document does not trigger a licence requirement for the Companies or SSGA in the Netherlands and consequently no prudential and conduct of business supervision will be exercised over the Companies or SSGA by the Dutch Central Bank (De Nederlandsche Bank N.V.) and the Dutch Authority for the Financial Markets (Stichting Autoriteit Financiële Markten). The Companies have completed their notification to the Authority Financial Markets in the Netherlands in order to market their shares for sale to the public in the Netherlands and the Companies are, accordingly, investment institutions (beleggingsinstellingen) according to Section 2:72 Dutch Financial Markets Supervision Act of Investment Institutions.
Norway: The offering of SPDR ETFs by the Companies has been notified to the Financial Supervisory Authority of Norway (Finanstilsynet) in accordance with applicable Norwegian Securities Funds legislation. By virtue of a confirmation letter from the Financial Supervisory Authority dated 28 March 2013 (16 October 2013 for umbrella II) the Companies may market and sell their shares in Norway.
Spain: State Street Global Advisors SPDR ETFs Europe I and II plc have been authorised for public distribution in Spain and are registered with the Spanish Securities Market Commission (Comisión Nacional del Mercado de Valores) under no.1244 and no.1242. Before investing, investors may obtain a copy of the Prospectus and Key Investor Information Documents, the Marketing Memoranda, the fund rules or instruments of incorporation as well as the annual and semi-annual reports of State Street Global Advisors SPDR ETFs Europe I and II plc from Cecabank, S.A. Alcalá 27, 28014 Madrid (Spain) who is the Spanish Representative, Paying Agent and distributor in Spain or at spdrs.com. The authorised Spanish distributor of State Street Global Advisors SPDR ETFs is available on the website of the Securities Market Commission (Comisión Nacional del Mercado de Valores).
United Kingdom: The Companies are recognised schemes under Section 264 of the Financial Services and Markets Act 2000 (“the Act”) and are directed at ‘professional clients’ in the UK (within the meaning of the rules of the Act) who are deemed both knowledgeable and experienced in matters relating to investments. The products and services to which this communication relates are only available to such persons and persons of any other description should not rely on this communication. Many of the protections provided by the UK regulatory system do not apply to the operation of the Companies, and compensation will not be available under the UK Financial Services Compensation Scheme.
Important Information
This document has been issued by State Street Global Advisors Ireland (“SSGA”), regulated by the Central Bank of Ireland. Registered office address 78 Sir John Rogerson’s Quay, Dublin 2. Registered number 145221. T: +353 (0)1 776 3000. Fax: +353 (0)1 776 3300. Web: ssga.com.
SPDR ETFs is the exchange traded funds (“ETF”) platform of State Street Global Advisors and is comprised of funds that have been authorised by Central Bank of Ireland as open-ended UCITS investment companies.
State Street Global Advisors SPDR ETFs Europe I & II plc issue SPDR ETFs, and is an open-ended investment company with variable capital having segregated liability between its sub-funds. The Company is organised as an Undertaking for Collective Investments in Transferable Securities (UCITS) under the laws of Ireland and authorised as a UCITS by the Central Bank of Ireland.
The information provided does not constitute investment advice. It should not be considered a solicitation to buy or an offer to sell any investment. It does not take into account any investor’s or potential investor’s particular investment objectives, strategies, tax status, risk appetite or investment horizon. If you require investment advice you should consult your tax and financial or other professional advisor. All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
ETFs trade like stocks, are subject to investment risk and will fluctuate in market value. The investment return and principal value of an investment will fluctuate in value, so that when shares are sold or redeemed, they may be worth more or less than when they were purchased. Although shares may be bought or sold on an exchange through any brokerage account, shares are not individually redeemable from the fund. Investors may acquire shares and tender them for redemption through the fund in large aggregations known as “creation units.” Please see the fund’s prospectus for more details.
The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
The views expressed in this material are the views of SPDR EMEA Strategy & Research through the period ending 15 July 2020 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Past performance is not a guarantee of future results.
All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone.
Investing in foreign domiciled securities may involve risk of capital loss from unfavourable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.
Standard & Poor’s, S&P and SPDR are registered trademarks of Standard & Poor’s Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation’s financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss Regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.
You should obtain and read the SPDR prospectus and relevant Key Investor Information Document (KIID) prior to investing, which may be obtained from spdrs.com. These include further details relating to the SPDR funds, including information relating to costs, risks and where the funds are authorised for sale.
© 2020 State Street Corporation.
All Rights Reserved.
2015149.133.1.EMEA.INST
Exp. Date: 31/07/2021