Fixed Income

EMD Relative weekly notes: Week Ending April 5, 2019


James Barrineau

James Barrineau

Head of Emerging Markets Debt Relative

The Market Driver Missing in Action

While investors may have enjoyed four straight months of strong returns in EMD, one traditional driver of asset price appreciation has been absent—a falling US dollar. Thus far, the rally can be traced to an anticipation, then an actualization, of the Fed changing course on the hiking cycle. Figure 1 shows the year-to-date return for the US dollar index, and its 1.2% appreciation thus far.

Figure 1


Source: Bloomberg. Chart depicts the DXY Index from January 4, 2019 through April 8, 2019. Performance shown reflects past performance, which is no guarantee of future results. Actual results will differ from index results.

In this way, the EMD market is remarkably echoing recent history in a way that does not repeat but very much rhymes. From 2013 through 2015 the Fed ended Quantitative Easing and embarked on the first tentative step of a hiking cycle. The dollar soared and asset price returns were terrible. In early 2016, Chair Yellen called time out and EMD assets rose just under 10% across dollar and local currency—yet the dollar appreciated just over 2% for the year.

In 2017, the dollar fell, spreads compressed to their lows, and local currency EMD returns, in general, were just over 15% while dollar EMD returns were around 10%. The Powell Fed's early 2019 turnaround driving asset prices while the dollar stays strong seems to us to be an identical script to 2016.

While we currently do not believe spreads can compress dramatically from here without the dollar falling—and thus moving liquidity from developed to emerging—it should be of comfort to investors that a traditional catalyst for strong asset price prospects has yet to enter the picture. 

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.