Emerging Market Debt Commentary: Q4 2022

Emerging market debt in the final quarter of 2022 delivered overall positive returns, with momentum fueled by improved investor sentiment. This was evident in EM credit and local currency markets, where positive performance was achieved in November and December. The accelerated pace of COVID policy relaxation in China, alongside easing US dollar strength, and the squaring of bear market positions contributed significantly. There was also a growing consensus that global inflation may have peaked and expectations grew that the pace of US Federal Reserve rate hikes would slow, providing additional tailwinds for EM performance during the fourth quarter.

China’s shifting away from its zero COVID policy and political developments in Latin America (LatAm) continued to be pivotal factors for investors considering allocations in EM portfolios. During Q4, Asian central banks generally remained relatively hawkish in their approach to policy rate hikes, especially in the Philippines and Taiwan. At the end of 2022, most central banks in Europe, Middle East, Africa (EMEA) and in LatAm were considered to be in the advanced stages of their monetary tightening cycles. The EM economies producing commodities are also viewed as likely to benefit from stronger global demand for commodities in the aftermath of Chinese reopening.

Over the course of the fourth quarter, net flows were negative for both EM hard currency and local currency funds, amounting to -$6.4bn and -$9.9bn, respectively. Over 2022, net flows pertaining to hard and local currency funds were -$44.3bn and -$45bn, respectively, according to JP Morgan.