November Emerging Markets Debt Update

Monthly Commentary

December 20, 2017

Emerging markets (EM) sovereign dollar-denominated debt returned 0.05% for the month, bringing year-to-date returns to 9.45%. Local currency debt returned 1.68% during the month, bouncing back from a weak October, bringing year-to-date returns to 12.93%. Corporate dollar debt performed in line with sovereign debt in November, returning 0.03% for the month and 7.62% year to date. The asset class continued to benefit from $2.52 billion in inflows across hard and blended currency funds in November. That was net of $0.05 billion in net outflows from local currency funds. Year to date, inflows across hard, blended and local currency funds have now surpassed $65 billion. New issuance in November totaled $62.11 billion with the majority issued by corporates.

Total Returns Across Asset Classes

Source: Bloomberg; JP Morgan; Data as of November 30, 2017

Looking at the individual asset classes:

Sovereign Dollar Debt: EM dollar sovereign debt returned 0.05% in November. EMBI GD Spreads ended the month at 288 basis points (bps), 4bps wider from the previous month but still 54bps tighter than at the start of the year. High-yielding oil producers — like Angola (+3.43% in November), Ecuador (+3.43%), and Gabon (+2.26%) — were among the best performers in the index during the month thanks to a third consecutive month of rising oil prices. Mexico, the largest index component, was also a major positive contributor to index performance in November, but has been more volatile due to NAFTA-related headlines and fears about a political shift towards populism in the country. Venezuela was a drag on index performance as it failed to pay interest on various bonds.

Corporates: EM dollar corporate debt returned 0.03% in November, in line with EM sovereign debt. Corporate index spreads ended the month at 272bps, flat on the month and close to the tights of the year. Year to date, corporate spreads are 42bps tighter than at the start of the year.

The best and worst performing sectors mirrored October, with the commodities sectors continuing to outperform and the consumer sector still exhibiting weakness. We would note, however, that the weakness in the consumer sector is primarily due to Teva Pharmacueticals, which represents approximately 30% of the sector (we have never held any Teva securities in our EMD portfolios). Corporates broadly continue to exhibit early to mid-cycle trends, benefiting from higher earnings and cash flow growth and deleveraging.

Local Currency Debt: Emerging markets local currency debt bounced back from a weak October, returning 1.68% for November. This brings total year-to-date returns to 12.93%. Malaysia was the best performer for the month, benefiting from stronger oil prices and growth momentum. On the other hand, Turkey was the worst performer as a combination of legal, political, and inflation-related concerns weighed on market sentiment. Flows into the asset class were moderately negative in November (-$0.05bn), representing the first month of outflows this year. Inflows for the year remain robust, totaling $18.81 billion.

New Issuance

Issuance has remained strong throughout the year, with an additional $62.1 billion in gross supply and $29.3 billion of net new issuance in November, which is typically a slower month. The higher numbers seen this year are partly reflective of the strong appetite for new debt supply as well as a desire by sovereigns and corporates to refinance existing debt during favorable market conditions and while the pace of U.S. monetary policy normalization remains moderate. Moreover, the surge in new supply has been driven primarily by Asia, which accounts for nearly 50% of gross issuance this year, and namely by Chinese corporate issuers. Net issuance, however, remains manageable and we expect this to decline as issuers continue to focus on refinancing and liability management.

Source: TCW calculations based on data provided by Bank of America Merrill Lynch & JPMorgan
* Net financing is issuance after amortizations, coupons, tenders, buybacks, and calls

Weekly EM Dedicated Bond Fund Flows (USD Millions)

Source: EPFR Global, CIBC, Data as of November 30, 2017

Signs of an EM Growth Pickup with the EM/DM Growth Differential Widening

Source: TCW Emerging Markets Research; Data as of December 11, 2017

More Than 55% of Global Fixed Income Yields 2% or Lower

Source: Standard Chartered; Data as of November 8, 2017

EM Vulnerability Has Declined Significantly Over the Past Few Years

Source: Deutsche Bank; Data as of June 30, 2017

Emerging Markets Index Valuations

Source: Bloomberg, JP Morgan; Data as of November 30, 2017


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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