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Emerging Market Debt Commentary: January 2023

Emerging market debt in January 2023 recorded positive returns amid improved investor sentiment towards EM assets. Consensus optimism driven by improved economic data is evident, with EM bonds being factored into long-term asset allocations. The EM performance rebound witnessed late in 2022, coupled with Chinese reopening, bolstered investor sentiment. The cascading effects from China’s scrapping of pandemic restrictions is expected to enhance momentum in EM through improved tourism, trade and commodity demand.

Inflation dynamics along with the stabilization in the US dollar increased the possibility of EM central bank policy detaching from the US Federal Reserve (Fed). Most EM central banks are nearing the end of their tightening cycles, with inflation having peaked nearly everywhere. The prospect of monetary policy easing contributed to a tightening of EM investment grade (IG) Sovereign spreads compared to US IG credit of similar rating and duration.

During January 2023, net flows were positive for both EM hard currency and local currency funds, amounting to $6.9bn and $1.4bn, respectively (Source: JP Morgan).

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