Varied Fundamentals and Risks Spell Divergence | Capital Group

  • ACCOUNTS
  • INVESTMENTS
  • CLIENT SOLUTIONS
  • INSIGHTS
  • EVENTS
  • ABOUT US

Investment Insights

September 2015

Varied Fundamentals and Risks Spell Divergence

“Analyzing newer African credits today brings back memories of Central and Eastern Europe in the mid-1990s. You actually have to spend a lot of time on the ground.”

—  Kirstie Spence

Kirstie Spence Portfolio Manager London office 21 years of experience (as of 12/31/16)

Currently, there is substantial variation in fundamentals among individual countries. For example, there is deflation in Eastern Europe, but inflation in Latin America. Meanwhile, many Asian countries have current account surpluses (in simple terms, exports and net foreign income exceed imports), while some Latin American economies confront substantial deficits.

Political and geopolitical developments add another aspect to divergence, as amply demonstrated in recent years. Consider Russia, for instance. In terms of fundamentals, Russia is a solid credit — running a current account surplus, a low level of outstanding debt and modest refinancing needs. However, the military conflict in Ukraine, the annexation of Crimea in 2014 and the ensuing international sanctions have had a meaningful impact on Russia’s economy, currency and bond market. Investor confidence took a further hit as the price of crude oil (a major Russian export) began to plummet in July 2014 — prompting the ruble to hit an all-time low against the dollar and bond yields to jump higher.

Lower energy and commodity prices have also highlighted structural weaknesses in other emerging economies. In Brazil, the outlooks for growth and inflation have worsened amid declining prices for key exports such as oil, iron ore and soybeans. Meanwhile, the Ghanaian government’s finances are under intense pressure and rating agencies have warned that further downgrades are possible given Ghana’s substantial budget gap and deteriorating growth.

Bright Spots and Some Challenging Near-Term Outlooks Among Major Credits 2015 Consensus Forecasts for a Selection of Larger EM Economies (as of June 15, 2015)

For current accounts, negative and positive figures indicate deficits and surpluses, respectively. For budgets, negative figures indicate government budget deficits.

Sources: Bloomberg, Capital Group, Datastream


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. 

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.