In January 2023, hard-currency emerging market debt1 returned +3.17%, while local-currency emerging market debt2 returned +4.29%. For emerging market corporate debt, the total return over the period was +3.04%3.
In hard-currency emerging market debt, there was a big positive impetus from US treasury yields, with the 10-year treasury yield falling by 37 basis points (bps) over the month to 3.51%. Spreads also moved favourably, with a tightening of 9bps over the month. In local currency debt, there was a sizeable positive impact over the month from FX, as emerging market currencies benefitted from US dollar weakness over the period. Although smaller than the FX contribution, there was also a significant positive contribution from bond returns.
In emerging market corporate bonds, apart from the treasury yield impact, there was also a positive impact from spreads tightening by 17bps over the month. High Yield emerging market corporates outperformed higher-rated, Investment Grade credits. By sector, real estate, oil and gas, and consumer sectors outperformed, while the weakest corporate sectors were infrastructure, financials, and pulp and paper.
The big improvement in market sentiment towards emerging market debt that we have seen since the low point of mid-October, accelerated considerably in January. As such, this has reduced some of the good value that we had seen opening up in certain areas of the market.
Still, we remain cautiously optimistic on the outlook for the broad asset class. Despite a busy month of primary issuance in January, investors’ high cash balances and large inflows into the asset class helped to drive positive returns across emerging market corporate, local-currency and hard-currency sovereign bonds. While nervousness about the global growth outlook remains, there are several supportive factors that have helped to boost risk assets over the month. This includes China’s reopening, a more benign European energy market and optimism regarding the possibility of the US Federal Reserve being able to engineer a ‘soft landing’.
Since global food and energy prices have peaked, we believe that inflation should decelerate in 2023, and we have begun to see some emerging market central banks pause their rate-tightening cycles. Brazil, Chile and South Africa are leading the way in this regard.
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)
3 As measured by the JP Morgan CEMBI Broad Diversified Index