Hi there. So last month we talked about emerging markets, emerging market equities in particular, and why the China rebound had been disappointing. But that meant that you should be looking for opportunities in active China equities.
But, lets talk about emerging market debt today. Where does that leave us? Well, for a start, we think about emerging market debt in terms of local currency, and hard currency. In local currency debt we do still think there is going to be positive continued momentum from lower rates on the local side, and given that EM inflation peaked in September 2022, and it’s been on a steady downtrend ever since, we don’t think that’s going to change. EM central banks have already started cutting, LatAm was ahead of the curve, and they’ve been leading the way. In fact, the rate cuts have been even more aggressive than we had expected. So it's looking good for local currency, with one caveat, that the recent bout of strength in the US dollar is a definite headwind and will affect local currency returns in the short term.
If we move to hard currency emerging market debt, we still see attractive carry, especially with what looks like the US rate cycle having peaked. I would think there's still room for some modest spread compression there as well, given that most EM vulnerabilities have already been recognised and are priced in. But this does of course depend on a hard landing being avoided. And that said, EM has also seen a lot of outperformance this year, especially on the high yield segment. So we do think that technicals are positive, there is going to be a limited amount of issuance, but it's really about walking that tightrope between avoiding a hard landing and seeing a stronger dollar, that really means we are going to see continued outperformance in emerging market debt.
With that, thank you very much.
Altaf Kassam,
EMEA Head of Investment Strategy & Research
Biography | State Street Global Advisors (ssga.com)
