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