Market Review

In May, hard-currency emerging-market debt (EMD) returned 1.80%[1], while local-currency EMD returned 1.61%[2]. In EM corporate debt, the total return over the month was 1.46%[3].

In hard-currency EMD, May presented a complex picture of economic indicators, leaving investors cautiously optimistic about Federal Reserve (Fed) rate cuts this year. We saw a significant drop in the University of Michigan’s consumer confidence index, which reached its lowest level since November, coupled with rising inflation expectations. Meanwhile, April’s Consumer Price Index report came in slightly below expectations, while the Producer Price Index exceeded expectations. Also, retail sales data for the same month showed no growth, indicating a slowdown in the US consumer. Sentiment leaned on the positive side, with investors increasing their expectations for Fed rate cuts by year-end from 31 basis points (bps) to 39 bps. This had a pronounced effect on US Treasury yields, with those on 10-year and 2-year instruments tightening by 13 bps and 9 bps, respectively, to 4.5% and 4.87%. The 2-year/10-year curve steepened 4 bps over the month to -38 bps. Oil prices experienced some volatility at the start of May due to rising tensions in the Middle East. They later recovered slightly due to falling US inventories but ultimately declined by 2.18%, ending the month at $81.62 per barrel.

In local-currency EMD, both local-currency bonds and currencies generated positive returns of 0.87% and 0.74%, respectively. The top performers were Chile, Turkey and the Czech Republic. Chile outperformed thanks to a copper price recovery that saw prices surge over 20% from March levels, driven by a combination of demand and supply factors. Demand was significantly boosted by the global shift towards green energy (in particular, electric vehicles). China, the world’s largest copper importer, announced plans to issue approximately CNY1 trillion (US$14 billion) in long-term bonds for infrastructure. Additionally, there was stronger-than-expected activity data from China. On the supply side, Chile, the world's largest copper exporter, has not yet reached pre-COVID-19 production levels due to challenges such as diminishing ore grades and water scarcity. Although a downward copper price correction has begun, the previous strong performance, combined with the pricing out of interest-rate cuts, led to a strong appreciation of the Chilean peso against the US dollar.


May proved to be a better month for EMD, with a modest fall in spreads as investors grew (cautiously) optimistic for a narrower growth rate gap relative to the US. We continue to see value in the high yield and frontier sectors, where spreads and yields look attractive. However, we remain cautious where countries have challenging amortisation schedules and a significant need for market access due to higher financing costs. Several countries still trade with yields above 10%, making market access difficult to justify. Nonetheless, we expect continued support from multilaterals and alternative sources, which reduces default risk and provides ample room for spread compression, as well as a fall in yields.

In EM local markets, we remain overweight in Latin America due to attractive real rates in the region. The combination of less elevated economic growth and contained domestic wage pressures provides central banks with more room to cut rates. For EM corporates, credit fundamentals remain supportive. As global economic growth slows, we are likely to see downward adjustments to operational performance. However, leverage levels remain low and interest coverage healthy. The asset class continues to offer good value versus developed market credit, namely in high yield. The ‘Goldilocks’ scenario for EM combines a more aggressive rate-cutting path for the Fed with slower US economic growth and a weaker US dollar. The scenario that could lead to a risk-off environment would be a higher terminal rate if inflation remains elevated.

  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