Market review
In October 2022, hard-currency emerging market debt1 returned +0.15%, while local-currency emerging market debt2 returned -0.88%. On a year-to-date basis, hard-currency emerging market debt has returned -23.83%, while local-currency emerging market debt has returned -19.29%.
In hard-currency emerging market debt, there was a positive impact from spreads which tightened by 17 basis points (bps) over the month. This was more than offset by an increase in US treasury yields, with the 10-year treasury yield rising by 23bps to 4.05% by the end of October. However, the overall index return for the period was still positive thanks to coupon income. Within the market, High Yield bonds outperformed Investment Grade bonds, with spreads for each tightening by 35bps and 15bps respectively. During the course of the month, there had been some speculation of a ‘pivot’ by global central banks to a less aggressive tightening path. However, another stronger-than-expected US consumer price index number caused markets to price in a further 75 basis point (bp) hike by the US Federal Reserve in November.
In the case of local currency debt, the negative return for the month reflected unfavourable emerging market currency movements against a generally strong US dollar, and to a lesser extent a negative contribution from bond prices. In the commodity space, after some months of sizeable declines, Brent crude oil recovered some ground, with the Brent crude oil price rising by +7.81% to US$94.83 per barrel over the month.
Outlook
While the short term economic outlook remains challenging across risk assets, we feel a lot of this is probably priced in now. Indicative of this, the yield on the hard currency JP Morgan EMBI Global Diversified Index rose to 9.66% by end-October, an increase of well over 4 percentage points since just the end of 2021. The current yield level is also now far above the 20-year average of 6.4%. Likewise, in the case of the local currency JP Morgan GBI-EM Global Diversified index, the yield rose to 7.43% by the end of October, up from 5.72% at end-2021, and well above the long term average of 6.5%.
However, we do expect volatility to persist in coming months owing in large part to continued aggressive policy tightening in developed markets. In this context, while the overall valuation picture is much improved, we think a highly selective investing approach remains sensible at the present time.
Footnotes
1 As measured by the JP Morgan EMBI Global Diversified index
2 As measured by the JP Morgan GBI-EM Global Diversified index (unhedged in US dollar terms)