While investors grapple with the implications of a second Trump term, the outlook for frontier bonds, EM local currencies, and EM corporate debt presents a mixed picture.
Frontier bonds
Resilience amid uncertainty
In the immediate aftermath of Trump's victory as the country’s 47th president, the market reaction for frontier market bonds has been surprisingly muted. Spreads on hard currency frontier bonds have moved only slightly wider, suggesting that investors are not overly concerned about the near-term implications of a Trump presidency.
There are no immediate headwinds on frontier market bonds following the US election, however, we do note that valuations on hard currency bonds are arguably at the expensive end with spreads moving below their 10-year average. The pace of monetary easing in the US is likely to slow which could impact countries in frontier space looking to regain market access.
On a more positive note, we believe hard currency debt will still benefit from the high carry narrative, along with low default risk over the next 2–3 years. Frontier local markets also continue to look attractive following some large foreign exchange (FX) devaluations earlier this year, and we anticipate a stronger US dollar will have a limited impact on these markets given the high nominal yields on offer.
More recently we have been adding risk in local markets, in particular Egypt, Nigeria, Pakistan, and Kenya. The low correlation of the asset class-to-US treasuries should also provide somewhat of a buffer for frontier bonds with idiosyncratic factors driving returns.
Emerging market local currencies
Facing headwinds
The outlook for emerging market local currencies is less sanguine as we anticipate significant pressure on EM FX due to the proposed policies of the Trump administration. We believe Trump's second term in office will likely usher in aggressive tariff hikes likely for Chinese-made goods. This would be negative for EM local currencies against the US dollar, as reduced US imports would likely support both US external accounts and the greenback.
We foresee Europe also suffering from imposition of tariffs – both direct and due to competition with Chinese exporters. EM currencies may well not weaken much or at all versus the euro. However often in EMs the most notable risks are internal and country-specific, which underscores the need for careful country selection. Declining inflation in countries such as Colombia is supporting real yields and will enable rate cuts, even if we do have a slower easing cycle in the US.
Emerging market corporate debt
Resilience and selectivity
In contrast to the more challenging outlook for emerging market local currencies, we foresee a second Trump presidency paints a relatively sanguine picture for EM corporate debt.
Unsurprisingly EM corporate debt remains resilient, spreads are slightly tighter with bonds not keeping pace with the move in rates. The all-in dividend yield at more than 6.5% continues to look attractive.1
We expect the spillover effect from protectionist Trump policies to be relatively muted as in past periods of EM weakness, EM corporate debt has consistently outperformed. We remain underweight on Asia as we believe, along with Mexico, is likely to be most negatively impact from an increase in tariffs and higher financing costs.
Final thoughts
We believe the post-election landscape for EM presents a complex and nuanced picture. While frontier bonds have shown resilience, EM local currencies face significant headwinds from the prospect of increased trade protectionism and a stronger US dollar. EM corporate debt, on the other hand, appears to be weathering the storm relatively well, with spreads remaining tight and yields continuing to offer attractive returns. As investors navigate this shifting landscape, we believe focus lies in careful country selection and a diversified approach to EM investments.
1 J.P. Morgan Corporate Emerging Markets Bond Index (CEMBI), as of November 7, 2024.
Important information
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
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