After a relatively calm October, November was a slightly weaker month for emerging market debt. Key drivers included weakness in several Latin American economies. Also, earlier optimism over a US-China trade deal faded somewhat, given the lack of concrete progress on that front. Both hard currency and local currency bond markets fell over the month, while corporate bonds posted positive returns.
Within Latin America, Brazilian assets lagged due to lacklustre growth. Aggressive central bank easing and strong corporate demand for US dollars also weakened the Brazilian real. Ecuador’s hard currency bond market was another underperformer in the region, coming under pressure as the country’s National Assembly voted down the president’s economic growth bill.
Chilean assets weakened during the month on the back of violent national protests, which impacted local bonds and the peso. The protests continued despite the government’s efforts to address social reforms, including an agreement to draft a new constitution. Please see Insights from the team for more on Chile.
The protests in Chile impacted progress towards a US-China trade agreement, as the APEC (Asia-Pacific Economic Cooperation series) summit in Chile – where President Trump and Chairman Xi were set to sign the deal – was cancelled. Since then, both parties have reiterated their intent to close the deal, although at the time of writing no date or location for achieving this had been fixed.
Another country rocked by social unrest was Lebanon, where the protests took a violent turn during the month. The political situation in the country remains uncertain as the top candidate for prime minister – former minister Mohammad Safadi – withdrew his candidacy. This led Lebanese hard currency bonds lower.
At the other end of the spectrum, Argentina managed to defy the wider fall in sentiment in Latin America and the country’s assets posted solid performance. Argentine assets gained on reports that the restructuring by the new administration would be more market friendly than expected and on news of recently elected President Fernandez holding talks with the IMF. We share some insights on Argentina following a recent trip here.
Top down views and outlook
Recent positive developments in trade, growth and monetary policy direction prompted us to increase our overall risk exposure in early October, moving to an overweight stance. We remain overweight risk, albeit to a slightly lesser extent.
Stronger Purchasing Managers’ Index data points to positive dynamics in the global manufacturing sector, and the level of liquidity in markets has improved. However, the global growth backdrop remains fragile.
We expect the continued backdrop of low rates to boost emerging market currencies by attracting investors to the higher yields they offer relative to many other markets. We also believe the trajectory for relative economic growth – with emerging market economies having relatively more room and potential to surprise on the upside than their developed market peers – can still support the asset class, albeit to a lesser extent than in previous months.
In local currency bonds, the risks seem quite balanced: local-yield valuations look quite stretched, although the soft growth and inflation environment provides ample scope for further easing by emerging market central banks.
Within hard currency bond markets, we still see some value given improving credit fundamentals overall, particularly in non-oil exporting, high-yield reform stories. We are also encouraged by a recent shift within the IMF to a more holistic approach to economic reform. However, given overall valuations and the already heavy investor positioning in hard currency bonds, we have reduced our exposure.
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