Market Review
October proved to be a weak month for Emerging Market Debt (EMD), ending several months of positive performance. Strength in the US economy led the market to dial back expectations of interest rate cuts. This put sovereign bonds under pressure as US Treasury yields moved higher. Hard currency sovereign bonds (-1.72%) [1] lost ground, while lower rated sovereign bonds, which are less sensitive to US Treasuries outperformed. As such, the frontier sovereign bonds index (+0.27%) [2] was the only index to post positive returns this month. Corporate bonds (-0.86%) [3] were also relatively more resilient, while local currency bonds (-4.61%) [4] posted their worst monthly return since September 2022, as the US Dollar strengthened by 3.2% and yields also moved higher.
Chart 1: EM index returns in October 2024
The annual International Monetary Fund (IMF) meetings were held in Washington this month and they lowered their global growth forecast slightly to 3.2% for 2025, warning of geopolitical worries and the risk of more trade protection. The IMF also noted that fiscal and funding pressures remain high in emerging markets.
Elsewhere in October, we saw betting odds suggesting an increased chance of the Republican candidate Donald Trump winning the US election. Markets perceive a Trump victory as leading to increased US fiscal spending, which drove US Treasury yields higher.
Another key theme in October was geopolitics, as tensions in the Middle East remain high. Iran launched missiles at Israel at the start of the month which raised concerns of escalating conflict in the region, particularly if Israel targeted Iran's oil facilities in response. Israel’s long-awaited retaliatory strikes on Iran however were limited to strategic military sites, which raised hopes of a potential de-escalation.
In terms of performance details, hard currency sovereign bonds fell by -1.72% as the negative treasury return (-2.81%) outweighed the positive impact (+1.13%) of spreads tightening by 27bps. Most of the spread tightening came from high yield countries, with several distressed names, such as Argentina, Bolivia and Sri Lanka outperforming, while investment grade countries underperformed due to higher sensitivity to US Treasuries.
Local currency sovereign bonds declined by -4.61% this month, marking the worst monthly return since September 2022.. The yield on the index rose by 27bps to 6.38%, resulting in a negative bond return (-1.09%). This was in addition to a large negative currency return (-3.56%). The weakness was pretty broad-based, with the perception of an increased likelihood of a Trump victory especially weighing on Latin American countries.
EM corporate bonds fell by -0.86%. Similar to sovereign bonds, high yield corporate bonds were more resilient (-0.19%), while investment grade corporate bonds lagged (-1.32%). Regionally, Europe was the top performer, while Latin America underperformed due to regional currency weakness.
Country news
| Politics | There were several hotly contested elections in emerging markets this month. In Mozambique, the ruling party’s candidate won the presidential election with 70% of the vote, although the opposition party rejected the results, with accusations of vote manipulation. In Georgia, the ruling Georgian Dream party won 54% of total votes, though exit polls had suggested a smaller share of closer to 41%. Pro-European opposition parties claimed the elections were rigged in favour of Russia and called for nationwide protest as a result. While Georgia looks to be moving away from European integration, Moldova very narrowly voted in favour of changing the constitution to formally commit to joining the EU, with 50.3% of the vote. |
| Restructurings | Ghana successfully issued new bonds this month after launching a bond exchange offer in September. As such it became the third country to have restructured its bonds this year following Zambia and Ukraine. Ethiopia’s government presented an updated restructuring proposal, which included an additional 18% nominal haircut. This was not well received by bondholders, however, who view the country as being in more of a liquidity crisis rather than a solvency crisis, thus making nominal haircuts unnecessary, in their view. |
| Multilateral Support | The IMF announced several policy changes this month to support low-income countries. In terms of individual agreements, the IMF reached staff-level agreements with Benin and Rwanda, and the board approved disbursements to Ukraine and Kenya. |
| Climate Change | Climate change and natural disasters continue to pose significant risks to emerging markets. In Ecuador, scheduled power cuts were extended from 8 to 14 hours per day as ongoing drought conditions severely affected hydroelectric energy production. Zambia is also experiencing severe electricity shortages caused by drought, which is having a negative economic impact. Indeed, as a result of this the IMF revised Zambia’s 2024 growth forecast down to 1.2% from 2.3%. |
| Rating Changes |
Sovereign rating upgrades exceeded downgrades once again this month, in a continuation of the trend we have seen since mid-2023. Several countries were upgraded on the back of strong economic growth and improved fiscal metrics, including Serbia (BBB-), Ivory Coast (BB), Albania (Ba3) and Mongolia (B). Ethiopia (CCC+) and Ghana (Caa2) were upgraded due to easing liquidity pressures, while Brazil (Ba1) has benefited from recent economic and fiscal reforms. Suriname (Caa1) was upgraded thanks in part to expected economic and fiscal windfalls tied to the start of oil production. On the other hand, Israel (A) was downgraded given the risk of a more protracted conflict with Hezbollah. Senegal (B1) was downgraded after it became apparent its fiscal and debt position was significantly weaker than previously stated, with Mozambique (CCC) also downgraded. |
Outlook
October was a challenging month for EMD, as higher US Treasury yields put pressure on sovereign bonds and pushed the US Dollar higher against Emerging Market (EM) currencies. We continue to see value selectively in high yield and frontier markets, given attractive spreads and yields. There is also some support coming from increased market access, continued multilateral support and progress on debt restructurings.
In EM local markets, we remain overweight in Latin America given attractive real rates in the region. Additionally, lower economic growth and contained domestic wage pressures provide more room for central banks to cut interest rates. For EM corporates, credit fundamentals remain supportive and net supply is expected to remain negative as EM corporates continue to pay down bonded debt. As global economic growth slows, we could see downward adjustments to operational performance. However, leverage levels remain low and interest coverage is healthy.
Overall, we feel that EMD continues to offer good value versus developed-market credit, especially in in high yield. The ‘Goldilocks’ scenario for EMD would combine more aggressive rate-cutting path by the Fed with slower US growth and a weaker US dollar. However, significantly weaker US data is a risk facto that could stoke recession fears, and that could trigger increased risk aversion.
- As measured by the JP Morgan EMBI Global Diversified Index
- As measured by the JP Morgan NEXGEM Index
- As measured by the JP Morgan CEMBI Broad Diversified Index
- As measured by the JP Morgan GBI-EM Global Diversified Index (unhedged in US dollar terms)