September Emerging Markets Update

Monthly Commentary

October 17, 2019

Market Update

September was characterized by weakening global growth expectations and rising market uncertainty. U.S. Treasury volatility caused EM sovereign dollar-denominated debt to decline, returning -0.46% for the month. EM corporate dollar-denominated debt, on the other hand, was less impacted returning 0.63%, while EM local currency debt rebounded from an August downturn, returning 0.96% in September. These figures bring year-to-date returns to 12.99% for EM dollar-denominated sovereigns, 10.64% for EM corporates, and 7.86% for EM local currency debt. Beginning to recover some of the strong portfolio outflows from August, September net inflows totaled $2.25 billion across local, blended, and hard currency funds, with nearly the entirety coming into hard currency funds. For the year, EM debt inflows total $33.8 billion, largely concentrated in hard currency funds. New issuance in September totaled $80.9 billion, with the majority issued by corporates.


Uncertainty around the outlook for global trade and growth remains a key theme, permeating all asset classes during a volatile September. We believe the balance of the year to be driven by the interplay between these uncertainties on the one hand, and synchronized central bank easing, fiscal stimulus in certain emerging markets and positive year-end seasonality on the other.

Among these concerns, U.S./China trade tensions remain top of mind. Trade issues continue to weigh on corporate capex decisions, and could in time impact both corporate margins and consumer confidence.

Global growth expectations remain soft, with negative economic data from both Europe and, increasingly, the U.S. as the fiscal impulse from the 2017 tax cuts fades. To compensate for the slowdown, all major central banks have adopted an easing bias. Nonetheless, despite lower rates, we believe business investment will continue to be constrained by trade and geopolitical issues, including growing political uncertainty in the U.S. The introduction of fiscal stimulus in Europe and/or additional measures in China could help to counter the slowdown. Expectations, however, remain tempered in the face of the uncertain geopolitical environment.

The one bright spot appears to be in Emerging Markets, where economic indicators have begun to surprise to the upside. Valuations are also compelling, with EM fixed income yielding more than 5% in a world where more than 55% of global fixed income yields less than 2%. Moreover, EM debt spreads are close to their historical average of 350 basis points while most other fixed income asset classes are trading at the tight end of their historical ranges. These relative growth and valuation advantages, together with a structural underweight to the asset class among institutional investors, are likely in our view to continue to drive inflows into the asset class, which has attracted $33.8 billion in net inflows year-to-date.


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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