Emerging market debt | Cover story


Pummelled by market forces that were lit- tle to do with them, the group of 24 coun- tries (as classified by rating agency MSCI) produced returns that were unlikely to con- vince investors of their value. By the end of 2018, the Bloomberg Barclays index tracking un-hedged dollar-denomi- nated emerging market debt had lost more than 4%. The index tracking debt in local currency fell more than 7% during the same period.


While global and European bond indices fared little better – having to cope with their own economic and political headwinds –


these developed markets traditionally retain the confidence of institutional inves- tors. According to State Street’s Bond Com- pass strategy outlook, in December “long- term investor holdings of local currency emerging market debt were… at a five-year low”. But why? There were no great upsets in Columbia or the Czech Republic, two of the group’s constituents, and Brazil’s new pres- ident, although not roundly welcomed by most of the international political left wing, was seen to be positive for business. Plain and simple, it was the dollar. The US


currency, against which most of these mar- kets peg their own monetary system, became too strong. Although many were firing on all cylinders, they were under- standably unable to keep up with


the


world’s largest economy. But the story changed in December, when chair of the US Federal Reserve Jerome Powell decided to halt – or at least pause – interest rates hikes. According to State Street, in that month, flows to emerging market debt “jumped above their five-year median for the first time in eight months”.


Issue 82 | March 2019 | portfolio institutional | 31


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