Trump Hits Emerging Market Bonds

In 2016, emerging market debt staged a spectacular recovery but it is important to make a distinction, however, between local currency and hard currency

Morningstar Manager Analysts 20 January, 2017 | 10:00AM

In 2016, emerging market debt staged a spectacular recovery following the dreadful performance of 2015. It’s important to make a distinction, however, between local currency and hard currency. In 2015, local currency sovereign debt disappointingly fell 14.9%, while hard currency sovereign debt generated a small gain of 1.2%.

The key drivers were the ‘managed’ economic growth slowdown in China and the strengthening of the US Dollar versus most currencies. Negative sentiment, especially towards local currency debt, continued into the first couple of months of 2016, evidenced by the outflow spillover from 2015.

Although January 2016 was a challenging month for the asset class, performance through the rest of the year was stong. Local currency sovereign debt almost fully recovered the losses from the previous year. The tailwind to the solid performance was a stronger fundamental situation in many emerging economies, with expectations of higher growth than in developed markets. Additionally, after seeing the USD rally against almost every emerging market currency during most of 2015, valuations in local debt had become significantly more attractive.

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Morningstar Manager Analysts

Morningstar Manager Analysts  research and rate hundreds of OEICs, unit trusts and investment trusts available for sale in the UK.

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