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.
Corporates
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.
Flows
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, Citi Research, 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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