US recovery and US Treasury yield rise biggest risk to emerging market debt expectations, says Aberdeen’s Diment
Brett Diment, head of Emerging Markets Debt & Sovereign Debt at Aberdeen Asset Management, says that returns from the asset class could be hit if recovery takes hold in the US, in turn sending US Treasury yields higher.
Emerging market debt ended the year on a positive note, as local currency debt surged in December and hard currency debt also gained. On the month, the JP Morgan EMBI Global Diversified index gained 0.71%, and the benchmark spread narrowed 18bp to +257 over US Treasuries; while the GBI-EM Global Diversified index increased by 2.16%. The high-yielders, Argentina and Venezuela were the top performers during December, as was Belize; while Egypt, Mongolia and Bolivia lagged behind. In local currency debt, South Africa was the top performer – benefitting from a rebound in its currency, while Malaysia and Indonesia lagged as their respective currencies underperformed.
For the full year, the JP Morgan EMBI Global Diversified index gained 17.44%, and the benchmark spread narrowed 147bp from +404 over US Treasuries; while the GBI-EM Global Diversified (local currency) index increased by 16.76%.
In hard currency debt, Ivory Coast was the top performer during 2012, increasing by 89.1% as it sought to normalise relations with creditors; other high-yielding credits, Venezuela, Pakistan and Belarus also performed strongly. Belize was the worst performing, having defaulted on its “superbond” in August, while highly-indebted countries Jamaica and Lebanon also struggled over the year. In local currency, Nigeria was the top performer, benefitting from inclusion into the benchmark index while Indonesia, Thailand and Malaysia lagged.
Our outlook for emerging market debt is constructive in 2013. However, we envisage more modest returns in the coming year following the strong performance of the asset class in 2012. Global growth will continue to be driven by emerging markets and we see most scope for returns deriving from EM currencies which have generally lagged the other parts of the asset class. The key risk to our returns expectations is the sensitivity of the asset class to rising US Treasury yields, which could occur if US macroeconomic indicators show some signs of recovery. Having said that, the prospects for stronger economic growth in the US and China may also herald a stronger outlook for emerging market exports given the interconnectivity of global trade, which could have a positive effect on emerging market assets. The eurozone sovereign debt crisis and the zero growth prospects will continue to make headlines in 2013, although its effect on emerging markets will most likely be limited to temporary episodes of risk-off sentiment given the reduced euro tail risk. China was at the forefront of investors’ minds in 2012, but having avoided a hard landing in 2012, going forward we expect a continued moderation in long-term potential growth, more importantly structural growth remains strong.