November Emerging Markets Debt Update

Monthly Commentary

December 13, 2016

Emerging markets debt was under pressure in November following the unexpected U.S. election results. Expectations of increased fiscal spending and pro-growth policies in the U.S. drove dollar strength and a sell off in U.S. Treasuries. As a result, local currency debt fared the worst, returning -7.03%, the worst return of any major asset class. EM sovereign dollar debt was also hit hard in this environment, giving back some of this year’s rally, but outperforming 10-year U.S. Treasuries (-4.09% vs -4.65%). EM corporate dollar debt was the most insulated to the post-election sell off as it is shorter duration. It outperformed the other EM indices with a return of -2.07% for the month. The weaker environment drove outflows of approximately $9 billion for the month across hard, local, and blended currency funds. New issuance in November totaled $26.3 billion with the entirety issued by corporates.

Total Returns Across Asset Classes

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

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. Spreads also widened 15 basis points on the back of concerns about the impact of increased U.S. protectionism on global trade. Sovereign dollar debt also underperformed corporates given the relatively longer duration profile of the former.

Mozambique was the best performing sovereign in the index, rebounding 13% in November after losing 28% the previous month. Investors were encouraged by reports that the government of Mozambique made advances toward an eventual program with the IMF, which is seen as a necessary step forward for the debt-laden country. On the other hand, El Salvador and Argentina were among the worst performers. As the most liquid region within EM, Latin America generally underperformed on the back of outflows.

Corporates: EM dollar corporate spreads tightened by 7 basis points, but bonds sold-off with the broader move in U.S. rates. Metals & Mining was again the best performing sector as expectations for increased U.S. infrastructure spending under a Trump administration furthered a rally in metals prices. On the other hand, Consumer and Infrastructure, the sectors with the longest duration in the index, were the worst performers.

Local Currency Debt: The dollar strengthened against all EM index currencies in November, weighing on performance. However, returns were differentiated. The worst performers in the index included Mexico, given its sensitivity to U.S. trade policy, and those potentially vulnerable to a reversal in capital flows (Turkey, Malaysia). Oil exporters Russia and Colombia, on the other hand, were the best performers after OPEC announced production cuts.

New Issuance

The issuance market cooled after a very busy September and October, totaling $26.3 billion gross and -$0.5 billion net in November. The entirety of new supply in the month came from corporates, particularly Asian corporates ($19.5bn or 74%).

*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


EMD market technicals softened in November and for fixed income markets more broadly as U.S. inflation and Fed rate hike expectations have risen in recent months. EMD experienced outflows, totaling $9.00 billion in November, across hard, local, and blended currency funds. Year-to-date flows, however, remain positive at $28.2 billion.

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

More Than 60% of Global Fixed Income Yields 2% or Lower

Source: Standard Chartered; Data as of December 8, 2016

Current Account Balances have Improved

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

Emerging Markets Index Valuations

Source: Bloomberg and JP Morgan, Data as of November 30, 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