Emerging bond markets have enjoyed a strong rally since the sharp drawdown experienced in the teeth of the COVID crisis last year. As a result, valuations have recovered significantly even as some of the fundamentals have deteriorated — most notably on the fiscal and debt sustainability side. And while the start of 2021 has shown that smooth sailing cannot be guaranteed, there are reasons for cautious optimism.
Following the robust recovery and taking account of recent developments, it is not unreasonable that investors might question whether there is still space for emerging market debt (EMD) to advance further. The post-COVID rally has seen a strong recovery from the lows, but we still see reasons to remain constructive on the asset class. While the macro backdrop has been changing, it is still largely supportive for EM Debt. Combined with the global hunt for yield, this is likely to continue to drive flows into the asset class and thereby support performance.
The EM debt advance continued following the US elections in November and the approval of COVID vaccines. Indeed, in the last two months of 2020, buoyant markets saw the riskier parts of the asset class outperform. In hard currency (HC) EMD, high yield issuers which had lagged in the initial rebound drove this leg of the rally, while local currency EMD was bolstered by recovery in EM currencies. Although the start of 2021 has brought volatility to EMD due to the rapid rise in US Treasury yields, this has been due to expectations for even stronger US growth; despite these short-term jitters, strong US and global growth is supportive of risk assets like EM debt.
This information is for informational purposes only, not to be construed as investment advice or a recommendation or offer to buy or sell any security. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. Any views expressed herein are those of the author(s), are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. There are no guarantees regarding the achievement of investment objectives, target returns, portfolio construction, allocations or measurements such as alpha, tracking error, stock weightings and other information ratios. The views and strategies described may not be suitable for all investors. SSGA does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision. Investing entails risks and there can be no assurance that SSGA will achieve profits or avoid incurring losses.
Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted.
Images of NYSE Group, Inc. are used with permission of NYSE Group, Inc. Neither NYSE Group, Inc. nor its affiliated companies sponsor, approve of or endorse the contents of this program. Neither NYSE Group, Inc. nor its affiliated companies recommend or make any representation as to possible benefits from any securities or investments.