July Emerging Markets Debt Update

Monthly Commentary

Emerging markets (EM) debt continued to post healthy returns in July, amid a broadly supportive and low volatility backdrop. Local currency debt outperformed, returning 2.07%, bringing year-to-date (YTD) returns to 12.75%. EM sovereign and corporate dollar-denominated debt performed largely in line with each other, returning 0.84% and 0.79%, respectively. That being said, sovereign debt has outperformed corporates this year, returning 7.08% versus 5.84% for the latter. The entire EM debt asset class continued to benefit from inflows across hard, local and blended currency funds, totaling $5.53 billion for the month and $47.4 billion this year. New issuance in July totaled $46.7 billion with the majority issued by corporates.

Total Returns Across Asset Classes

Source: Bloomberg; JP Morgan; Data as of July 31, 2017

Looking at the Individual Asset Classes:

Sovereign Dollar Debt

EM dollar sovereign debt maintained positive return momentum in July, as spreads tightened 6 bps to 304 bps. Since the beginning of the year, sovereign dollar spreads have tightened 38 bps and are approaching their three-year tights, a reflection of improving fundamentals and investor interest in the asset class.

Mexico and Brazil were the largest contributors to index performance in July. Mexico has been the leading contributor to index performance this year as political risks and concerns about NAFTA have abated. With its fiscal reform agenda back on track and growth improving, Brazil has recorded similarly strong numbers year to date (+9.5%), despite stumbling in May when interim-president Michel Temer became embroiled in corruption allegations. Venezuela was the largest detractor from performance during the month as extreme turmoil in the country’s domestic politics has taken full focus.


EM dollar corporate spreads tightened by 3 basis points in July. Similar to sovereigns, corporate spreads are approaching three-year tights.

Metals and mining led with a return of 2.01% in July, supported by a double digit rise in the price of iron ore as well as strong gains in both gold and copper prices. On the other hand, the diversified sector was the worst performing, returning 0.43% during the month. This tends to be a more defensive sector with higher average credit quality than other components of the index, and as such, underperformed higher beta sectors.

Local Currency Debt

General dollar weakness relative to EMFX continued in July, and the asset class benefitted from continued strong inflows. Brazil was the top performer for the month, retracing losses from the prior quarter as the political backdrop stabilized. Argentina was the bottom performer as polls showed former populist President Cristina Fernandez de Kirchner leading in a Senate race. However, we would note that Argentina has started to recover in August as the primary results came in better than expected for the ruling, market-friendly Cambiemos party.

New Issuance

EM sovereign issuance slowed in July, totaling just $3.14 billion, with the entirety from Asia investment grade. EM corporates, however, continued with the record pace seen through the first half of the year. EM corporate issuance exceeded $40 billion for the fourth time this year, and year-to-date issuance has now topped $290 billion. It’s important to note that YTD net issuance for both sovereigns and corporates is less than half of total issuance. In addition, we expect a moderate slowdown in issuance in the second half of the year as supply tends be disproportionately larger in the first half.

Source: Bank of America Merrill Lynch, JP Morgan, TCW Emerging Markets; Data as of July 31, 2017
*Net financing requirement assumes cashflows from amortizations, coupon payments, tenders and buybacks will be re-invested.


Strong inflows continued across hard, local and blended currency funds, totaling $6.94 billion for the month and $41.63 billion this year, making this the strongest start to a year on record. Inflows have been supportive of the asset class and have helped to absorb the bulk of new supply.

Weekly EM Dedicated Bond Fund Flows (USD Millions)

Source: EPFR Global, CIBC, Data as of July 31, 2017

Additional Fundamental and Valuation Charts

Signs of an EM Growth Pickup with the EM/DM Growth Differential Widening

Source: TCW Emerging Markets Research; Data as of August 8, 2017

Nearly 60% of Global Fixed Income Yields 2% or Lower

Source: Standard Chartered; Data as of August 2, 2017

Current Account Balances Have Improved

Source: Morgan Stanley; Data as of March 31, 2017

Emerging Markets Index Valuations

Source: Bloomberg, JP Morgan; Date as of July 31, 2017


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This material is for general information purposes only and does not constitute an offer to sell, or a solicitation of an offer to buy, any security. TCW, its officers, directors, employees or clients may have positions in securities or investments mentioned in this publication, which positions may change at any time, without notice. While the information and statistical data contained herein are based on sources believed to be reliable, we do not represent that it is accurate and should not be relied on as such or be the basis for an investment decision. The information contained herein may include preliminary information and/or "forward-looking statements." Due to numerous factors, actual events may differ substantially from those presented. TCW assumes no duty to update any forward-looking statements or opinions in this document. Any opinions expressed herein are current only as of the time made and are subject to change without notice. Past performance is no guarantee of future results. © 2019 TCW