August Emerging Markets Debt Update

Monthly Commentary

September 19, 2017

The backdrop was supportive for emerging markets (“EM”) debt in August, as Treasuries rallied and commodities stabilized. Local currency debt outperformed, returning 1.79% and bringing year-to-date returns to 14.67%, as EM currencies advanced against the dollar. EM sovereign dollar-denominated debt similarly returned 1.77% for the month, outperforming corporate dollar debt, which returned 0.96%. Sovereign dollar-denominated debt has outperformed corporate dollar-denominated debt this year, with returns of 8.98% and 6.86%, respectively. The asset class continued to benefit from inflows across hard, local and blended currency funds, totaling $4.38 billion for the month and $51.82 billion this year. New issuance in August totaled $19.2 billion with the majority issued by corporates.

Total Returns Across Asset Classes

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

Looking at the Individual Asset Classes:

Sovereign Dollar Debt

EM sovereign dollar debt returned 1.77% in August on the back of stronger Treasuries and modest spread tightening. EMBI spreads ended the month at 300 bps, 4bps tighter on the month and 42bps tighter on the year. August marked the second best month in the past 12 for EM sovereign dollar debt, trailing only February of this year, as 65 of the 66 countries represented in the index posted positive returns.

Argentina and Mexico were the largest contributors to index performance in August. After underperforming in May and June, Argentine assets have recovered in recent months on the backs of improved economic growth and better-thanexpected performance of the reform-oriented, ruling coalition in the August primary mid-term elections. Mexico benefited from the perception that NAFTA renegotiations will not be as punitive as had been expected earlier in the year. Mexico has also broadly benefited from stronger-than-expected economic growth in the second quarter and from an improvement in U.S. growth, higher industrial production and consumer demand. Venezuela was again the largest detractor from index performance during the month as the market is increasingly pricing in the potential for default.


EM dollar corporate debt returned 0.96% in August, underperforming EM sovereign debt but outperforming U.S. and EU corporate debt. Corporate index spreads ended the month at 295bps, 7bps wider on the month but 18bps tighter on the year.

The commodities sectors led within the corporate space. Oil and gas returned 1.76% during the month as a number of producers announced strong second quarter results, while metals and mining returned 1.52%, as the surge in metal prices continued in August. The consumer sector was the worst performing, returning -0.49% during the month. Consumer returns were dragged down by Teva Pharmaceuticals, which represents nearly 30% of the consumer sector.

Local Currency Debt

General dollar weakness relative to EMFX continued in August, and as such, the asset class returned 1.79%. The asset class also benefited from continued strong inflows. Russia was the top performer for the month as falling inflation reinforced expectations for additional monetary easing. The Philippines was the bottom performer as news of its widening current account deficit weighed on the currency.

New Issuance

EM sovereign issuance slowed in July, totaling just $3.14 billion, The “summer slowdown” in EM sovereign debt issuance persisted in August. Looking ahead, while we anticipate a slight uptick into the end of the year compared to August lows, we expect the general slowdown in issuance witnessed thus far in the second half of the year to endure as supply tends be disproportionately larger in the first half. Net issuance remains manageable for both sovereigns and corporates.

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


Inflows continued across hard, local and blended currency funds. The $4.38 billion of inflows in August (and $51.82 billion year to date) 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 August 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 September 1, 2017

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

Source: Standard Chartered; Data as of September 8, 2017

Current Account Balances Have Improved

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

Emerging Markets Index Valuations

Source: Bloomberg, JP Morgan; Data as of August 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