- Portfolio Manager
- About Us
- My Account
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
This is an excerpt from our 2023 Mid-year Investment Outlook, in which specialists from across our investment platform share insights on the economic and market forces that we expect to influence portfolios in the second half of the year. This is a chapter in the Bond Market Outlook section.
After 13 years of relative underperformance, there’s now a quiet bull market occurring in emerging markets (EM) local debt. Over the past 12 months,1 EM local debt has returned 6.6% — by far outperforming the rest of the global fixed income universe (Figure 1).
Over the past 13 years, EM local debt wasn’t just “not first” among its peers, it was last. As Figure 1 illustrates, in period from January 2008 through April 2022, this asset class produced an annualized return of 1.5% with 12.5% volatility, making it the worst-performing component of global fixed income in the decade-plus since the Global Financial Crisis.
So why the remarkable change over the past year? And against a backdrop of US Federal Reserve (Fed) tightening to the tune of 475 basis points in the past year, no less?
The major difference between this cycle and previous ones is that the majority of EM central banks acted in an unusually orthodox manner, preemptively raising interest rates well ahead of the Fed. In fact, the weighted EM central bank rate had already risen by 250 basis points by the time the Fed initiated its rate-hiking cycle in March 2022.
Going forward, it may be reasonable to expect a period of consolidation or more muted performance in this space until it becomes clearer that the Fed rate-hiking cycle has paused. Such a pause would set the stage for the second leg of an EM local debt bull market, as we believe that most EM central banks will begin easing rates later this year. What’s more, EM inflation continues to surprise to the downside, apparently normalizing more quickly than in developed market counterparts.
We’re optimistic that recent stronger EM local debt performance could prove to be a longer-term trend because, after 13 years of underperformance, investors in this space have become frustrated. It can take a long time to unwind this type of negative sentiment, which ultimately contributes to the creation of more enduring bull markets. It appears that a positive role reversal for EM local debt may be underway.
“BLOOMBERG®” and the Bloomberg indices listed herein (the “Indices”) are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the Indices (collectively, “Bloomberg”), and have been licensed for use for certain purposes by the distributor hereof (the “Licensee”). Bloomberg is not affiliated with Licensee, and Bloomberg does not approve, endorse, review, or recommend the financial products named herein (the “Products”). Bloomberg does not guarantee the timeliness, accuracy, or completeness of any data or information relating to the Products.
Wellington Management is not sponsored, endorsed, sold, or promoted by Morningstar, Inc., or any of its affiliates (all such entities, collectively, “Morningstar Entities”). The Morningstar Entities make no representation or warranty, express or implied, to the owners of Wellington Management or any member of the public regarding the advisability of investing in any Wellington Management product generally or in particular or the ability of the Wellington Management product to track general market performance. THE MORNINGSTAR ENTITIES DO NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF WELLINGTON MANAGEMENT PRODUCTS OR ANY DATA INCLUDED THEREIN AND MORNINGSTAR ENTITIES SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN.
Information has been obtained from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy. The index is used with permission. The index may not be copied, used, or distributed without J.P. Morgan’s prior written approval. Copyright 2023, J.P. Morgan Chase & Co. All rights reserved.
1 As of 9 May 2023
Macro implications of the AI revolution: is the market right?
Macro Strategist John Butler sets out an initial framework to help answer key questions about the potential macro impact of artificial intelligence.
The “cleanest dirty shirt” now has too many stains
Fixed Income Portfolio Manager posits that US fiscal profligacy will change the game for asset allocators.
How would emerging markets weather a “standard” recession?
Macro Strategist Gillian Edgeworth explores the potential impact of a developed market recession on emerging markets.
How to interpret the Bank of Japan’s latest policy shift
We analyse the wide-ranging investment implications of the Bank of Japan's latest policy shift.
Emerging markets debt outlook: A glass half full or half empty?
Against a still-challenging global backdrop for emerging markets, Macro Strategist Gillian Edgeworth highlights opportunities created by extreme credit spread dispersion across individual countries.
Credit market outlook: Partly sunny with a chance of good value
In his 2023 credit market outlook, Fixed Income Portfolio Manager Rob Burn highlights some potentially attractive opportunities in the wake of this year's market sell-off.