Ninety One releases Emerging Market Debt Indicator


Ninety One (previously named Investec Asset Management), an independent, active global investment manager, has published its latest Emerging Market Debt Indicator, that summarises recent developments across the Emerging Markets (EM) debt universe and presents outlook for the sector.

The attached paper[1] covers the market background highlighting “The paring back of monetary policy support, coupled with inflation concerns, weighed on sentiment.  Most EM currencies weakened vs. the US dollar, given the risk-off sentiment shift.”

Peter Eerdmans, Head of Fixed Income and Co-Head of Emerging Market Sovereign & FX, says: “Inflation concerns remain front of mind for investors, dampening optimism around the growth recovery story.  With various data prints still pointing to rising headline inflation, the view that this is a largely temporary phenomenon is being challenged globally.

“By purely focussing on the effects of higher inflation, investors risk missing the broader cyclical picture, which remains attractive across EMs, especially against the backdrop of a global energy transition and the associated infrastructure spending that it will entail.  While there will certainly be supply bottlenecks with accompanying surges in inflation as economies recover, most of these should prove transitory, if history is any guide.

“The recent reinflationary pressure should be viewed against the much longer disinflationary trend of the last 25 years.

“Investors should also note that the scaling back of support measures – likely to start in the coming months – will take place before the Fed considers raising rates.

“The revival in goods demand and impact on global manufacturing continues to be supportive for EM.

“The US$1.9 trillion stimulus package and improvements in how governments, firms and society deal with COVID will also have a positive impact on demand. While the reintroduction of lockdown measures in parts of the world could weigh on the services sector, particularly travel, higher immunity levels (natural and vaccination-derived) should ensure the effect is modest.

“We expect the recovery in activity from the low levels recorded last year to push EM growth rates ex-China higher in the latter part of the year, despite some fiscal drag as spending normalises after the pandemic-related surge. We continue to believe global central banks, and particularly those in DM, will generally remain supportive of economic growth and that the risk of an abrupt shift away from loose monetary policy that threatens the global recovery remains low.

“The more predictable policy backdrop of the US administration under President Biden is also expected to be modestly supportive for EMs. We think these macro and geopolitical adjustments are likely to be accompanied by a high degree of divergence for sovereign debt, reflecting factors such as countries’ vulnerabilities at the start of the crisis (which may have been exacerbated by the pandemic), how well governments have handled the crisis, and – crucially – how they will finance and reduce their deficits.

“ With a significant proportion of Developed Markets sovereign debt still in negative real yield, we expect investors to reassess allocations to EM debt, as its yield and relative-value attractions remain intact. As well as the allure of relatively attractive yields, supportive tailwinds include strong commodity prices and historically high terms of trade, with EM (ex-China) growth projected to accelerate in the second half of the year, despite the modest fiscal drag.

“We remain moderately constructive on prospects for the EM debt asset class and through recent months have kept a small risk-on top-down target across our strategies. While we continue to see longer-term value in EM FX, we are more cautious on a tactical basis, given the more mixed short-term dynamics.

“On local currency bonds we are more constructive and modestly overweight some of the markets with steep yield curves, especially when considering the relatively high amount of central bank tightening priced in across many emerging markets. While we continue to see value in EM hard currency high-yield bonds with spreads still wide to pre-COVID levels, we have modestly reduced our overall overweight in hard currency debt.”


[1] Emerging Market Debt Indicator, September, 2021

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