FR France
Obligations taux fixe

EM Local Debt’s Time to Shine?

janvier 2020 - 3 min lire

Emerging markets (EM) local currency denominated debt may be poised to outperform.

EMD performance was strong across the board in 2019, and the fourth quarter was no exception. It’s perhaps no surprise that sovereign hard-currency denominated bonds were the star performers throughout much of the year—typically viewed as somewhat lower-risk than their local-currency denominated counterparts, the asset class benefited from higher duration in a year when rates largely trended downward. 

Toward year-end, this trend began to reverse. And while attractive opportunities remain across the sovereign hard-currency universe—particularly in countries like Brazil, where credit risk appears to be overpriced—attractive value has also emerged elsewhere.

In the fourth quarter, EM local currency bonds (5.2%) were the standout, outperforming both sovereign debt (1.81%) and corporate debt (2.2%).1 There are a few factors that may have contributed to this. Following the global financial crisis, the economy went through a massive deleveraging that resulted in an exodus out of riskier assets, EMs chief among them. Because of these outflows, EMs have been running smaller account deficits over time. As a result, the financing needs of EMs have come down over the last decade—meaning their balance sheets are in much better shape today. The headwinds faced by EMs have also battered their currencies and, based on measures that consider currencies’ real effective exchange rates relative to their terms of trade, EM currencies are now trading close to their cheapest levels in a decade. 

EM Currencies Trade Near Cheapest Levels in Last Decade (Real Effective Exchange Rate/Terms of Trade) 

Source: Haver Analytics. As of September 30, 2019.

The alignment of these factors suggests that the stage may now be set for the decade-old aversion to risk to begin to reverse course in 2020—paving the way for EM currencies to outperform, and potentially driving strength in EM local debt. 

Another area that remains attractive is EM corporate debt, which has one of the highest Sharpe ratios of any major asset class over the last decade. Fundamentals remain stable, with many companies exhibiting positive revenue and EBITDA growth in recent years. Balance sheets have remained healthy and default rates have stayed low.

Drilling down, short-duration high yield debt looks particularly attractive, and its lower interest rate sensitivity could prove valuable if global economic conditions improve this year. Given the various idiosyncratic risk flare-ups in several high yield rated countries over the last few years, corporate spreads have in many cases widened, despite relatively strong fundamentals. The spread differential between EM investment grade corporates and EM high yield corporates also remains at elevated levels compared to the averages of recent years, suggesting that relative value is still on offer in the high yield segment of this universe.

High Yield Continues to Offer Good Relative Value Versus Investment Grade in EMs

Source: Bloomberg. As of December 31, 2019.

Despite these market opportunities, it’s important to remain mindful of the risks that come alongside them. As we discussed in our 2020 Outlook, we believe the single largest risk facing investors in the year ahead is the potential for a material slowdown—or even a recession—in China. While we view this as an extremely unlikely scenario, if it were to occur, it could have serious repercussions on the broader global economy. 

The discord in the Middle East is another concern, and any missteps could have very serious ramifications—particularly considering that the region represents about 30% of the world’s energy supply, 20% of global trade passages and 4% of global GDP. This, combined with a number of ESG concerns, has led us to believe that the geopolitical risk in the region is underpriced. 

Despite the recent U.S./China trade agreement, we expect to see mixed headlines throughout 2020, and it seems with each passing day another emerging market suffers from political unrest or popular uprising. From Chile to Colombia to Ecuador to Hong Kong, there is no shortage of hot spots. A number of idiosyncratic risks have emerged as well, with Venezuela, Lebanon and Argentina chief among them—in each of these countries, bond prices dropped precipitously as tensions escalated. In fact, during the fourth quarter, nine countries were in default or distress scenarios—the most in a decade.  

All of these factors undoubtedly represent risks, and these risks must be taken into account in the form of country and credit analysis. But they also represent opportunity.

When corporate debt issuers are unduly punished for the country in which they are domiciled, or when negative headlines result in an overreaction in a country’s currency, active managers, and therefore their investors, can possibly benefit. Likewise, when it comes to EM sovereign debt, country selection matters—and it matters a lot. And while there are certainly a number of bad apples, there are also bright spots. 

The bottom line is that value opportunities exist today across all three of these markets, and will continue to appear going forward. But it’s not a time to ‘buy the market.’ Rather, it will take careful analysis of macro, country and company-specific risks, and the willingness and ability to move quickly, and with intention, when opportunity arises.

1. Source: J.P. Morgan. As of December 31, 2019.

Toutes les prévisions figurant dans ce matériel s’appuient sur les opinions de Barings concernant le marché à la date de rédaction du matériel et sont sujettes à changement sans préavis, en fonction de nombreux facteurs. Toute prédiction, projection ou prévision n’est pas un indicateur fiable de résultats futurs ou probables. Investir comporte toujours des risques. La valeur de tous placements et de tous revenus de placements peut diminuer ou augmenter et n’est garantie ni par Barings ni par quiconque. LES PERFORMANCES PASSEES NE SONT PAS UN INDICATEUR FIABLE DES PERFORMANCES FUTURES.

Lire la suite Moins

Tous résultats d’investissement, toutes compositions de portefeuille et tous exemples indiqués ou fournis dans ce matériel le sont exclusivement à titre indicatif et ne constituent aucunement des indicateurs fiables des résultats d’investissement, compositions de portefeuille ou des investissements futurs. La composition, la taille et les risques associés à un placement peuvent différer considérablement des exemples fournis dans ce matériel. Nous n’affirmons aucunement qu’un placement sera obligatoirement rentable ou qu’il n’encourra pas de pertes. Le cas échéant, l’évolution des taux de change pourrait également affecter la valeur des placements. Tout investisseur potentiel doit lire les potentiels matériels décrivant nos services afin d’obtenir, le cas échéant, des détails et de connaître les facteurs de risques associés à tout Fonds et/ou Stratégie mentionné
dans ce matériel. Les Fonds mentionnés dans ce matériel sont autorisés à la commercialisation en France.

Barings est le nom commercial des activités de gestion d’actifs internationales et des activités afférentes de Barings LLC et de ses entités affiliées à travers le monde. 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, et Baring Asset Management Korea Limited sont chacune des sociétés affiliées de services financiers détenues par Barings LLC (chacune, individuellement, une « Affiliée »)

ABSENCE D’OFFRE : ce matériel est fourni à titre informatif uniquement est n’est pas une offre ou sollicitation d’achat ou de vente de tout instrument ou service financier dans toute juridiction. Le contenu des présentes a été préparé sans tenir compte des objectifs d’investissement, de la situation financière ou des besoins particuliers de quiconque étant amené à les recevoir. Ce matériel n’est pas un conseil en investissement, une recommandation en investissement, une recherche d’investissement ni une recommandation sur le caractère pertinent ou approprié de tout titre, produit, investissement ou stratégie d’investissement particulière, il ne doit pas être traité comme tel et ne doit pas être interprété comme un matériel prévisionnels.

Sauf mention contraire, les opinions contenues dans ce matériel sont celles de Barings. Ces opinions sont exprimées de bonne foi en fonction des faits connus au moment de leur préparation et sont sujettes à changement sans préavis. Les équipes de gestion de portefeuille individuelles peuvent avoir des opinions différentes de celles exprimées dans les présentes et peuvent prendre des décisions d’investissement différentes pour différents clients. Certaines parties de ce matériel pourraient s’appuyer sur des informations reçues de sources que nous considérons comme fiables. Même si tout a été mis en œuvre pour que les informations contenues dans ce matériel soient exactes, Barings ne fournit aucune garantie, explicite ou implicite, concernant l’exactitude, l’intégrité ou l’adéquation de ces informations.

Tout service, titre, investissement ou produit exposé dans ce matériel pourrait ne pas convenir à un investisseur potentiel ou ne pas être disponible dans son pays ou territoire. Les droits de propriété intellectuelle de ce matériel sont détenus par Barings. Les informations figurant dans ce matériel peuvent être utilisées à des fins personnelles, mais ne peuvent être modifiées, reproduites ou distribuées sans le consentement de Barings.



We use cookies on our website to provide you with the best experience. By proceeding to our site you agree to our Cookies Notice and our site Terms and Conditions.