eyes on emerging local currency debt

The bond market

Global fixed income, currency and commodities group team rates this bond fund very positively, set for strong performance in absolute and relative terms compared to other fixed income sectors

by Annalisa Lospinuso
26 May 2023 11:50

The prospects of a progressive decrease in inflation turn the light back on emerging market debt in local currency. The Global fixed income, currency and commodities group team of JP Morgan Asset Managementin the usual weekly Bond Bulletin, expresses a positive assessment of this asset class which can continue to offer attractive returns throughout 2023.


“With the emergence of deflationary trends in both developed and emerging markets – states the Bond Bulletin – operators’ attention to the persistence of the cost of living has begun to wane. This new orientation should continue with the progressive acceleration of the disinflation in emerging markets, favored by the strong monetary tightening implemented by the central banks of the region in the early stages of the cycle”. The aggressive approach of the governors has increased the cost of borrowing, creating a brake on growth and a cooling down of economic activity. “The reduction in global commodity prices has also contributed to bringing down inflation – continues the team of JP Morgan Asset Management – which, at the beginning of the Russo-Ukrainian conflict, had suffered severe setbacks. In the coming months, base effects should contribute to a significant reduction in headline inflation rates, given the particularly high level of the consumer price index in the period April-June 2022”.


Which emerging market to focus on? These are countries that have different characteristics even if, in this economic context, both nominal and real interest rates are attractive in all emerging markets. “The high benchmark rates prevailing in the region – reads the Bond Bulletin – consequently make rates on emerging local currency securities seem relatively cheap compared to historical levels. However, this is only one side of the coin. We expect the central banks of emerging markets will initiate monetary easing policies earlier than those of more developed countries, given that they have been the first to raise rates in the current cycle. If this prediction were to come true it would be an extraordinary event, but it would be even more so if it were to occur on a large scale”.


A weakening of the U.S. dollar and expectations of a rate cut by the Federal Reserve towards the end of the year they could catalyze trading activity towards this asset, favoring the component of emerging currencies. “If we add to this the greater relative strength of the fundamentals compared to previous cycles and a positive technical picture – concludes the Global fixed income, currency and commodities Group team of JP Morgan Asset Management – We understand that emerging local currency debt could be poised for strong performance in absolute and relative terms relative to other fixed income sectors. The valuations of emerging market securities in local currency are attractive: nominal rates reach up to 13% and real yields up to 7% (as of May 17, 2023)”.

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