Download Emerging Market Debt Monthly Update

For professional and regulated qualified investors only
Emerging Market Debt Monthly Update
March 2017
Contact us
Adviser sales:
0800 085 0383
[email protected]
bmogam.com/adviser
Discretionary sales:
+44 (0)20 7011 4444
Total return in USD
Emerging Markets Debt
Emerging Markets Equity
US Treasury
Developed Markets Equity
US High Yield
1 Month
Year to date
0.38%
3.87%
2.35%
11.15%
-0.06%
0.68%
0.82%
5.85%
-0.21%
2.71%
Source: Bloomberg, J.P. Morgan, MSCI, Bank of America Merrill Lynch; as of 31 March 2017
Emerging Markets Debt: J.P. Morgan EMBI Global Diversified Index; Emerging Markets Equity: MSCI Emerging
Markets; US Treasury: Bank of America Merrill Lynch US Treasury Index; Developed Markets Equity: MSCI World;
US High Yield: BofA Merrill Lynch US High Yield Index
[email protected]
bmogam.com
Institutional business:
+44 (0)20 7011 4444
institutional.enquiries
@bmogam.com
bmogam.com
Factors influencing the Asset Class
Post-election euphoria following Donald Trump’s victory ran out of steam last month after
the Republican administration’s failure to pass a new law on healthcare. Investors saw the
setback as a sign that proposed tax reforms may not happen. The Republican majority in
the House crumbled, undermining President Trump’s claim to be a successful dealmaker.
The promise of a substantial cut in corporate taxes was arguably a key factor supporting
the post-election bounce in US equities. The Federal Reserve surprised on the negative
side by raising rates in March. At the start of the month, the markets had judged a rate
rise only a 50-50 likelihood. The S&P500 index closed flat on the month.
Data on the US economy continued to surprise positively, albeit with far stronger
signals coming from survey data compared with hard production data. For example, the
Consumer Confidence index soared to a 16-year high, but industrial production could
only manage growth of 0. 5% year-on-year. Ahead of the Fed meeting, the 10-year bond
yield climbed from 2.4% to breach the 2.6% ceiling but then fell back to 2.4% after the
message accompanying the meeting signalled that the overall pace of interest rate
“normalisation” remains unchanged. Short speculative positions in US Treasury futures
have also been at record highs, dampening any tendency for yields to rise.
Crude oil prices fell by 7% over the month and West Texas Intermediate (WTI) touched
$47, the lowest price for four months. Buoyed by good compliance levels from
Organization of the Petroleum Exporting Countries (OPEC) producers in abiding by recently
agreed production quotas, oil prices responded to the ongoing recovery in the US rig
count. Furthermore, a 12% year-to-date accumulation of crude oil inventories in North
America revealed weaker than expected demand, although this was partly seasonal in
nature. Prices recovered somewhat after Saudi energy minister Khalid al-Falih suggested
any decision on extending production cuts should only occur after the upcoming OPEC
meeting in May, thus reducing one source of market anxiety.
The rally in US corporate bond spreads finally reversed in March. From a post-election
peak of 530 basis points in November, the ML US High Yield index spread tightened to 375
basis points (bps) mid-month, but then backed-up to 410 bps by the end of the month.
Continued
PAGE 2
Emerging Market Review
The Mexican peso was the best performing emerging market
currency last month, climbing 7.2% against the US dollar. The
sovereign spread performance was also positive: a tightening
of 20 bps for the index sub-component. Foreign portfolio
inflows into equities and fixed income reached $3.4bn between
December and February, the highest three-month figure for
over two years. Investors have taken heart from the Mexican
central bank’s orthodox policy of interest rate rises – including
a 25bps hike last month – as well as signals from Washington
that amendments to the NAFTA trade agreement may only be
modest. President Trump’s top trade advisor, Peter Navarro, said
that the US could ally with Mexico to form “a mutually beneficial
regional powerhouse”.
EMBI spread and yield
6.1
500
5.9
450
5.7
400
5.5
350
5.1
5.3
4.9
300
4.7
250
Mar 16
May 16
Jul 16
Sep 16
Emerging Market Debt (EMD) Spread
Nov 16
Jan 17
4.5
Mar 17
EMD Yield
Source: Bloomberg, JP Morgan
In South Africa, a far-reaching cabinet reshuffle roiled markets.
Significantly for South African asset markets, the country’s
respected finance minister, Pravin Gordhan, and his deputy
were removed from their posts. The currency weakened by
almost 7%, and credit spreads widened, as the country – which
was already on the cusp of being ranked sub-investment grade
by S&P with a negative outlook - was swiftly downgraded
by the credit rating agency. The sacking followed a power
struggle between rival factions within the ruling African
National Congress (ANC). President Zuma, whose presidential
term cannot be renewed, is trying to shoe-horn his ex-wife,
Nkosazana Dlamini-Zuma, into the leadership post of the ANC.
Her appointment and her likely win in the presidential elections
in 2019 could shield him from 783 charges of corruption,
currently suspended due to presidential immunity. The country is
at a crossroads with the independence of the national treasury
coming under increased political pressure. The newly appointed
finance minister Malusi Gigaba stated in his inaugural press
conference that he would look to implement ‘radical economic
transformation’. So far, there are no specific details on what
this policy will entail, but investors are concerned about an
unaffordable and corruption-prone nuclear power programme as
well as the prospect of a widening fiscal deficit.
In Paraguay, hundreds of angry protesters entered the
parliament building, setting it on fire. The outrage was
in response to the government’s attempt to change the
constitution to enable the president to be re-elected. This is a
highly sensitive topic in Paraguay given its recent experience of
one of the longest dictatorships in Latin America, under Alfredo
Stroessner. Paraguayan bonds were among the top performers
last month, and the country remains a solid investment story in
light of its rapid growth, conservative fiscal management, and
ample untapped resources. The public debt/GDP ratio is one of
the lowest in the region at just 25.5%
Which were the best performing countries in March?
Belize (+51.4%), Mozambique (+2.7%) and Paraguay (+2.5%)
were the best performing countries in March. Venezuela (-8.9%),
Ecuador (-3.4%) and Bolivia (-2.1%) were the worst performers.
Country returns, top and bottom ten
Belize
Mozambique
Paraguay
Cameroon
Angola
Mongolia
Armenia
Mexico
Uruguay
Tunisia
Namibia
Trinidad and Tobago
Azerbaijan
Zambia
Malaysia
Ivory Coast
South Africa
Bolivia
Ecuador
Venezuela
-10
Source: JP Morgan
0
10
20
30
40
% March 2017 total return
50
Continued
60
PAGE 3
Market outlook
Relative to market expectations, we are optimistic on emerging
market fundamentals. Developed economies are accelerating,
which is supporting demand for commodities and other exports
from emerging market countries. Domestic demand is resilient
in certain regions (e.g. Central Europe, South East Asia) but
remains sluggish at best in some of the larger emerging market
countries such as Russia, Turkey, Mexico, and Brazil. The risk
posed to emerging market assets from aggressive US trade
and tax policies may materialise later than expected, and in a
more benign form. In China, the ongoing, massive quasi-fiscal
stimulus underway will cushion the economy ahead of the 19th
Party Congress, while optimists are hoping for a renewed push
on structural reforms in the second half of the year.
Structural reforms are progressing in Brazil, India, and Peru.
In addition, International Monetary Fund programmes provide
policy anchors in a growing list of emerging market countries,
including Iraq, Ukraine, Egypt, Honduras, Mongolia, and
potentially Zambia and El Salvador. Sovereign spreads in most
cases are cushioned by strong sovereign external balance sheets
and limited near-term financing needs. Investors will be closely
watching the Federal Reserve to see whether Trump’s proposed
fiscal stimulus will lead to a tougher-than-expected monetary
policy response.
Technicals are benefiting from ongoing quantitative easing
in Japan and Europe, and the low yields prevailing in many
developed bond markets bolster demand for higher-yielding
emerging market bonds. Fund flows into these bonds have
recovered the losses that followed the US election, and demand
for credit funds in general remains strong. As expected,
emerging market sovereign issuance has been strong this year,
exceeding $60bn in the first quarter. Middle Eastern issuers
are expected to continue to access international markets. On
valuations, emerging market sovereign spreads of 310bps are
below the post-financial crisis average, but still offer a premium
to similarly rated US corporate bonds.
The main risk is that the incoming Trump administration sparks
a trade war with China or other emerging market countries,
damaging global growth prospects. Upcoming elections in
Europe could raise political risk premia in developed countries,
with potential spill-over effects mainly in Eastern Europe. A
more expansive fiscal policy and progressive tightening of
the US labour market could lead to more Fed rate hikes than
the market is currently expecting, tightening global liquidity
conditions, and generating renewed US dollar strength and
associated commodity price weakness. Finally, weaker than
expected growth in China could reverse the incipient rebound in
oil and commodity prices, and impact currencies and spreads in
a host of emerging market countries.
Information has been obtained from sources believed to be reliable but J.P. Morgan does not warrant its completeness or accuracy.
The Index is used with permission. The Index may not be copied, used, or distributed without J.P. Morgan’s prior written approval.
Copyright 2017, J.P. Morgan Chase & Co. All rights reserved.
MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI
data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or
financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to
constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not
be relied on as such.
Past performance should not be seen as an indication of future performance. The value of investments and income derived from
them can go down as well as up as a result of market or currency movements and investors may not get back the original amount
invested.
© 2017 BMO Global Asset Management. All rights reserved. BMO Global Asset Management is a trading name of F&C Management Limited, which is authorised and regulated by the
Financial Conduct Authority. CM12801 (04/17) AT, BE, CH, DE, ES, FI, FR, GB, IE, IT, LU, NL, NO, PT, SE.