The performance of EM Sovereign Debt can—and does—vary widely from country to country. Barings’ Cem Karacadag explores how an active approach can be key to selecting the most attractive opportunities, while also avoiding the bad apples.
While general market conditions for emerging markets debt (EMD)—conventionally known as market beta—may be the main driver of EMD returns over short time horizons (days or weeks), idiosyncratic country fundamentals and risks ultimately drive prices and performance over the long term. As a result, there is sizable dispersion in the total returns on the debt of 70+ emerging market sovereigns in the J.P. Morgan EMBI Global Diversified (EMBIGD) bond index.
In the first three quarters of 2019, for instance, the EMBIGD returned 12.9%.¹ While the great majority of EM sovereigns generated positive returns, some countries’ debt returned significantly more than others’. Eleven sovereigns outperformed the index by more than five percentage points in total return, and 10 sovereigns underperformed the index by more than five percentage points in total return. On an absolute basis, while “only” four countries generated negative returns during this period, three of them fell sharply. Lebanon returned -10%, Argentina returned -37%, and Venezuela returned -57%.
Performance data for three years through September 30, 2019 paints a similar picture. In the past three years, the EMBIGD returned 14.4%.¹ Once again, the vast majority of sovereign debt delivered positive returns, but some countries much more so than others. Seventeen sovereigns outperformed the index by more than 10 percentage points in total return. And once again, on an absolute basis, Lebanon (-11%), Argentina (-46%), and Venezuela (-78%) fell precipitously.
1. Source: J.P. Morgan. As of September 30, 2019.