October Emerging Markets Debt Update

Monthly Commentary

November 09, 2016

Emerging markets debt returns in October were primarily driven by macro factors: U.S. election uncertainty, global bond curve steepening, and dollar strength. As a result, EM sovereign dollar debt and local currency debt fared the worst, returning -1.24% and -0.85%, respectively, whereas corporates outperformed (-0.01%), given their shorter duration nature. Despite the weaker environment, inflows continued across hard, local, and blended currency funds, totaling approximately $4.53 billion for the month as EM debt remains one of the strongest performing asset classes this year. Year-to-date, all three EM debt indices have posted double-digit returns – 16.1% for local currency, 13.3% for dollar sovereign, and 11.1% for dollar corporate debt. New issuance in October totaled $64.6 billion across both corporates and sovereigns.

Total Returns Across Asset Classes

2016Source: JP Morgan, Bloomberg; Data as of October 31, 2016Total

Looking at the individual asset classes:

Sovereign Dollar Debt: EM sovereign debt returns this month were primarily driven by the U.S. rates sell-off/steepening, as spreads remained unchanged. Sovereign dollar debt underperformed both corporates and local debt given its longer duration nature. Commodity exporters Ecuador and Ghana were the best performing countries in the index; lower quality energy producers caught up to their peers as investors rotated farther down the credit spectrum.

On the other hand, Mozambique and Venezuela were the worst performers. After just restructuring its only sovereign bond in April, Mozambique dropped 28% in October after the government announced its intention to restructure the instrument once again. Venezuela was under pressure as tensions between the government and opposition escalated and PDVSA underwent a debt swap that provided some relief, but with less participation than initially hoped. Still, Venezuela remains the best performing sovereign year-to-date (+43%).

Corporates: EM dollar corporates ended the month essentially flat, with spreads tightening 13bps. Metals & Mining was the best performing sector as high yield and distressed names generally outperformed, whereas Consumer was the worst performing sector due to its higher credit quality and longer duration profile.

Local Currency Debt: October proved to be a difficult month for EM local currency debt. The dollar strengthened versus all G10 currencies, gaining more than 3% on a tradeweighted basis during the month, as well as against most EM currencies. The dollar move, however, was not unilateral, and the three best performing local currency markets—Brazil, South Africa, and Mexico—all gained on an FX basis versus the dollar in October. The combination of improving political situations and high yields amid declining inflation continues to attract investors to Brazil and South Africa, while Mexico rebounded as Hillary Clinton surged in the polls.

On the other hand, Colombia and Romania were the worst performing markets in the index. Colombian local bonds and the peso weakened at the start of October after voters rejected a government-sponsored peace agreement referendum with the rebel FARC guerilla organization and into the end of the month with falling oil prices. The Romanian leu was under pressure as the euro weakened against the dollar, exacerbated by the passing of a mortgage law that is unfavorable to domestic banks and lenders.

New Issuance

The market remained open with October the busiest month for issuance this year, totaling $64.6 billion gross and $33.1 billion net. This marked the single biggest month for issuance since January 2014. The majority was issued by corporates, with $33.8 billion in new corporate bonds, but sovereign issuance reached a new high year-to-date at $30.9 billion, with more than half ($17.5 bn) issued by first time issuer, Saudi Arabia. New issuance has been well-absorbed, but we expect the calendar to slow into the end of the year.

*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


Market technicals remain supportive of EMD, which continues to see inflows across hard, local, and blended currency funds. Inflows totaled $4.53 billion in October, bringing the year-to-date total to $37.2 billion. We would attribute the strong flows to both improving fundamentals and the fact that yields globally remain depressed.

Weekly EM Dedicated Bond Fund Flows (USD Millions)

Source: EPFR Global, Citi Research

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 October 31, 2016

Current Account Balances have Improved

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

Nearly 66% of Global Fixed Income Yields 2% or Lower

Source: Standard Chartered; Data as of November 4, 2016

Emerging Markets Index Valuations

Source: Bloomberg and JP Morgan, Data as of October 31, 2016



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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