In July 2022, hard-currency emerging market debt1 returned +2.89%, while local-currency emerging market debt2 returned +0.29%. The improved performance in the month followed a tough first half of the year, in which hard-currency emerging market debt returned -20.31%, while local-currency emerging market debt had returned -14.53%.
In the case of hard-currency emerging market debt, the biggest positive driver was a significant reduction in the US treasury yields, with the 10-year treasury yield falling by 36 basis points to 2.62% by the end of the month. A key reason for this was investors paring back some of their previously extremely hawkish expectations regarding how much the US Federal Reserve would raise US policy interest rates by. In turn, this reflected a markedly weaker US economic outlook, which in large part reflected the expected negative impact of higher US interest rates. In the commodity space, Brent crude fell by 4.18% to US$110 per barrel over the month, as the market continued adjusting for a less favourable global growth outlook.
While the overall outlook remains challenging, we are seeing pockets of value opening up in certain areas of emerging market debt. Spreads on indices remain well above their medium-term averages and yields are also at the top end of the range for the past decade. Some distressed names are also looking more viable, with some governments altering course to gain access to much-needed funding support from the IMF and other multilateral institutions.
We believe that inflation should decelerate towards the end of the year, given the likely peaking of global food and energy prices two months ago. In turn, this should enable an end to interest rate-tightening cycles in emerging markets. However, at the same time, we do expect volatility to remain elevated for a while longer, given the backdrop of slowing global growth and aggressive monetary tightening in many developed countries. Therefore, we think a highly selective investing approach remains sensible at the present time.
- 1 As measured by the JP Morgan EMBI Global Diversified index
- 2 As measured by the JP Morgan GBI-EM Global Diversified index (unhedged in US dollar terms)