“A big question for the sector’s 2019 performance will be whether investors continue to remain enthusiastic,” note the Emerging Markets Debt team at Eaton Vance, a global investment manager.

Thus far, the answer is an emphatic yes.

“Through the first week of February, investors have poured USD $21.1 billion into EM fixed income, according to JP Morgan, including USD $10.9 billion into hard-currency bonds, USD $3.7 billion into local-currency EM bonds and USD $6.5 billion into EM bond ETFs – their second-highest inflow on record.

“The strong demand has boosted total return for the sector. Through January 31, 2019, the dollar-denominated JP Morgan EM Bond Index Global-Diversified (EMBI) has returned 4.41%. The JP Morgan Corporate EM Bond Index Global-Diversified (CEMBI) returned 2.72%. The local-currency JP Morgan Government Bond Index – EM (GBI-EM) returned 5.46%.

“Sentiment for EM actually began to turn positive last November, and looking at the trailing three-month performance shows the depth of the rebound – the EMBI returned 5.37%, the CEMBI 3.29% and the GBI-EM 9.83%. In contrast, for example, the GBI-EM lost 6.21% in 2018.”

“Valuations are more attractive than they have been in quite a while, and we expect flows to stay supportive. However, fundamentals remain a concern in some key countries, and global macro risks like slower growth, ongoing trade wars and renewed Fed rate hikes could always reassert themselves. The need for country-specific due diligence and careful evaluation of risk factors is as important as ever.”

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