Public Fixed Income

Emerging Markets Debt: Springtime in January?

December 2022 – 7 min read

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.

Want to read the full article?

View PDF

Omotunde Lawal, CFA

Head of Emerging Markets Corporate Debt

Dr. Ricardo Adrogué

Head of Global Sovereign Debt and Currencies

Cem Karacadag

Head of Emerging Markets Sovereign Debt

Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Any investment results, portfolio compositions and or examples set forth in this material are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this material No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments. Prospective investors should read the offering documents, if applicable, for the details and specific risk factors of any Fund/Strategy discussed in this material.

Barings is the brand name for the worldwide asset management and associated businesses of Barings LLC and its global affiliates. Barings Securities LLC, Barings (U.K.) Limited, Barings Global Advisers Limited, Barings Australia Pty Ltd, Barings Japan Limited, Baring Asset Management Limited, Baring International Investment Limited, Baring Fund Managers Limited, Baring International Fund Managers (Ireland) Limited, Baring Asset Management (Asia) Limited, Baring SICE (Taiwan) Limited, Baring Asset Management Switzerland Sarl, and Baring Asset Management Korea Limited each are affiliated financial service companies owned by Barings LLC (each, individually, an “Affiliate”).

NO OFFER: The material is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service in any jurisdiction. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This material is not, and must not be treated as, investment advice, an investment recommendation, investment research, or a recommendation about the suitability or appropriateness of any security, commodity, investment, or particular investment strategy, and must not be construed as a projection or prediction.

Unless otherwise mentioned, the views contained in this material are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Individual portfolio management teams may hold different views than the views expressed herein and may make different investment decisions for different clients. Parts of this material may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this material is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any service, security, investment or product outlined in this material may not be suitable for a prospective investor or available in their jurisdiction. Copyright in this material is owned by Barings. Information in this material may be used for your own personal use, but may not be altered, reproduced or distributed without Barings’ consent.