Emerging Markets Debt: Springtime in January?
With the inflation and geopolitical fogs around the world dissipating, and a monetary policy pivot potentially in the cards, 2023 is shaping up to be a promising year for emerging markets debt.
After a dismal couple of years from an investment return perspective, 2023 is shaping up to be a promising year for emerging markets (EM) debt. As of early December 2022, EM local and sovereign debt indexes had lost a fifth of their value since peaking in December 2020 and September 2021, respectively.1 EM corporate bonds had lost 31% from the peak in June 2021.2 As the COVID-19 pandemic receded and the world progressively reopened, the monetary and fiscal accommodation used to cope with the effects morphed into a global inflationary spike. Russia’s invasion of Ukraine in February 2022 and the sanctions that followed added fuel to the inflationary fire. Global central banks responded aggressively but late as they sought to grasp the economic whirlwinds around them.
As we look to 2023, the world appears to have started to make more sense, especially from the perspective of global central banks. Inflation has finally started reacting to the monetary tightening implemented since the first quarter of 2022, global economic activity has cooled, the war in Ukraine appears to be contained, and China is showing increasing signs of revisiting its COVID policy. In a nutshell, a monetary policy pivot looks increasingly likely. Macroeconomic policy accommodation may still be some ways away, but major central banks have started to talk about slowing down the pace of interest rate increases, while EM central banks have largely completed their task. The financial markets have also started anticipating—correctly, in our view—the end of the tightening cycle. Based on the work of our sovereign debt team, we expect the next surprise for central banks to be an unexplained fall in inflation during the second half of 2023—and accommodative policy will likely follow.
1. Source: J.P. Morgan GBI-EMGD; J.P. Morgan EMBIGD.
2. Source: J.P. Morgan CEMBI.