After a steep COVID-driven decline in EMD values, a strong and admittedly surprising recovery has followed. In his latest article, David Furey, Head of Fixed Income Strategists EMEA at State Street Global Advisors, shares his view on the perspectives for hard (HC) and local currency (LC) EMD assets. “Following the recovery in EMD assets from their recent lows, we see greater justification and support for EMD LC valuations, while HC investors will continue to encounter challenges going forward,” he writes.
Figure 2 illustrates the scale of the market reaction for both HC and LC and the subsequent rebound which has surprised many observers.
“The latest crisis will invariably deliver disinflationary effects across the globe including for LC economies of emerging markets. Local bond markets have seen yield declines to new lows driven by these deflationary effects and the significant monetary policy response. HC markets, on the other hand, given their weaker credit profiles and foreign borrowing, are less attractive; here, spreads remain wide, reflecting the significant challenges that some countries face in the near term,” Furey says.
Within the HC EMD universe, Furey is particularly pessimistic regarding such debt from countries that have already been struggling before the impact of COVID-19 such as Argentina, Venezuela and Lebanon. However, he sees a better narrative within the investment grade part of the HC EMD landscape, where recovery has been more justified. A lot of the HC borrowers in this space tend to be Middle Eastern and the snapback in oil prices has eased concerns considerably.