A Period of Adjustment Is Underway | Capital Group

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Investment Insights

September 2015

A Period of Adjustment Is Underway

“Despite the possibility of modest currency losses, it’s my view that a number of local bond markets have the potential for competitive total returns.”

—  Laurentius Harrer

Laurentius Harrer Portfolio Manager Los Angeles office 28 years of experience (as of 12/31/16)

Six years ago, the global economy was emerging from recession in the wake of the financial crisis. At that time, developing countries such as China, India and Brazil were the engines of global growth, while emerging markets debt was a source of strong investment returns for bond investors.

Today, with the notable exception of India, growth in many of the larger economies has slowed. Indeed, the economies of two emerging powerhouses — Brazil and Russia — are expected to contract in 2015. Bond and currency markets have reflected some of these challenges. Returns over the past two years have been decidedly mixed, with the J.P. Morgan EMBI Global Index of U.S. dollar bonds registering a negative 1.4% return for 2013 and 2014 combined.

Dollar-based investors have seen broad dollar strength swamp advances in many local-currency bond markets. Over the same 2013–2014 time period, cumulative returns from the J.P. Morgan GBI-EM Global Diversified Index were 7.9% in local currency terms but –14.2% in unhedged U.S. dollar terms. In some ways, the market selloff of May 2013 (widely referred to as the taper tantrum) was an early indication that broad investor sentiment regarding emerging markets was losing some of the newfound resilience of the previous few years. The 2013 selloff was sparked by comments from the U.S. Federal Reserve’s then-chair, Ben Bernanke, who indicated that the official bond purchases (quantitative easing) could be scaled back sooner than widely anticipated.

With yields elevated since mid-2013 and currencies generally weaker relative to the U.S. dollar, valuations already appear reasonable in a number of emerging countries. Volatility — perhaps due to country-specific political or economic challenges, as well as changes in global economic conditions and monetary policy — could, in our view, create compelling return opportunities for longer term investors.

Weaker Currencies, Higher Yields Have Helped Create Attractive Valuations

Source: J.P. Morgan 

Through 7/31/15. Month-end yields for U.S. dollar–denominated bonds and local currency bonds are drawn from the J.P. Morgan Emerging Markets Bond Index (EMBI) Global Diversified and J.P. Morgan Government Bond Index-Emerging Markets (GBI-EM) Global Diversified, respectively. EM exchange rate (rebased to 100 on 6/30/10) implied by latter bond index.


Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses or the collective investment trust's Characteristics statement, which can be obtained from a financial professional, Capital or your relationship manager, and should be read carefully before investing. 

Bond ratings, which typically range from AAA/Aaa (highest) to D (lowest), are assigned by credit rating agencies such as Standard & Poor's, Moody's and/or Fitch, as an indication of an issuer's creditworthiness.

Investing outside the United States involves risks, such as currency fluctuations, periods of illiquidity and price volatility, as more fully described in the prospectus. These risks may be heightened in connection with investments in developing countries. 

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice. 

Past results are not predictive of results in future periods.