September Emerging Markets Debt Update

Monthly Commentary

October 13, 2016

Emerging markets debt has been one of the best performing asset classes globally, driven by a combination of improving fundamentals, attractive carry, stabilization in commodity prices and currencies, and healthy technicals. Year-to-date, the EM local currency index has returned 17.07%, outperforming both the sovereign dollar debt index (14.77%) and corporate dollar debt index (11.11%).

Total Returns Across Asset Classes YTD 2016

Source: Bloomberg; JP Morgan; Data as of September 30, 2016

In September, developed markets headlines set the tone, as the market navigated through two central bank meetings (Fed, BOJ), noise around the U.S. elections, and European bank concerns. Uncertainty around OPEC also contributed to volatility but benefited oil exporters following an announcement of a preliminary agreement to curb production. Emerging markets local currency debt outperformed hard currency debt, benefitting from dovish central bank sentiment, returning 2.02% for the month. EM sovereign dollar debt returned 0.34%, followed by EM corporates, 0.15%. Investment grade hard currency debt underperformed high yield, primarily due to its longer duration. The technical backdrop remained supportive as net portfolio flows to dedicated EMD totaled approximately $5.14 billion with inflows across hard, local, and blended currency funds. New issuance in September totaled $57 billion with the majority issued by corporates.

Looking at the individual asset classes:

Sovereign Dollar debt: Despite the volatility, EM dollar sovereign spreads ended the month essentially flat, tightening 2 bps. Commodity exporters Venezuela, Mozambique, and Mongolia were the best performing countries in the index. Venezuela remains the best performing sovereign year-to-date (55%) on the back of higher oil prices and the potential for a political transition. Mozambique and Mongolia rebounded from recent lows after their governments independently reached out to the IMF in the hopes of establishing an arrangement with the Fund. Thinner liquidity in these credits also exacerbated the rally. On the other hand, Mexico was the worst performer in the index due to its sensitivity to the U.S. election cycle (when Donald Trump rises in the polls, Mexico tends to sell off). Turkey was also under pressure following its downgrade to high yield, which led to its subsequent exit from major emerging markets investment grade indices.

Corporates: As was the case for sovereigns, EM dollar corporates posted modest returns in September, buoyed by high yield, which outperformed investment grade corporates by 56 bps. Spreads widened 7 bps during the month. Commodity exporters were among the best performing sectors in the index, whereas TMT (lower beta) and Industrials (high concentration of Mexican corporates) were the worst performing.

Commodity Sectors Lead Gains Within the EM Corporate Space

Source: JP Morgan, Bloomberg; Data as of September 30, 2016

Local currency debt: In September, EM local currency debt rebounded following a flat August, driven by a combination of yield compression and currency appreciation. South Africa, the worst performing market the previous month (-7.6%), rallied 10.6% due to the cessation of political noise, M&A related inflows, and an overall search for yield. Oil exporters Colombia and Russia also were among the best performers, benefitting from higher oil prices.

On the other hand, the Philippines and Mexico were the worst performing markets in the index. Recent aggressive statements from the Philippines’ newly elected president have led to uncertainty over both trade and economic policy. The Philippine peso fell by 4.0% versus the dollar, its largest monthly decline in more than ten years. In addition, as mentioned previously, Mexico was under pressure on the back of U.S. election noise. During the month, the Mexican central bank hiked its policy rate by 50bps to help support the peso.


Market technicals remain supportive of EMD. Inflows have totaled $32.7 billion this year, with over 80% entering in the third quarter alone. We would attribute this to both improving fundamentals and the fact that yields globally remain depressed. Flows are expected to remain robust heading into the balance of the year, with expectations of $55-60bn for the full year.

Weekly EM Dedicated Bond Fund Flows (USD Millions)

Source: EPFR Global, Citi Research

New Issuance

September marked the busiest month for issuance this year after April, totaling $57.0 billion gross and $30.0 billion net. The majority was issued by corporates (Asia investment grade in particular, which alone accounted for nearly 30% of new issuance). This brings the total for 2016 to $358.7 billion of gross and $121.2 billion of net issuance. New issuance has been well-absorbed, and we expect the calendar to remain robust for the balance of 2017, with several new issuers coming to the market (Saudi Arabia, for example).

*Net financing requirement assumes cashflows from amortizations, coupon payments, tenders, and buybacks will be re-invested.
Source: TCW calculations based on data provided by Bank of America Merrill Lynch & JPMorgan

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 30, 2016

Nearly 68% of Global Fixed Income Yields 2% or Lower

Source: Standard Chartered; Data as of September 30, 2016

Current Account Balances have Improved

Source: Morgan Stanley; Data as of March 31, 2016

Emerging Markets Index Valuations

Source: Bloomberg and JP Morgan


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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. © 2018 TCW