Fixed Income

EMD Relative weekly notes: Week Ending June 28, 2019

07/02/2019

James Barrineau

James Barrineau

Head of Emerging Markets Debt Relative

The EM local currency index will, as of this writing, sport a 5% plus return for the month of June.

This has happened only three times in the past five years, and represents only the sixth time the index has returned over 3% in a single month over that time span as shown in Figure 1.

Figure 1

EMDR-Blog-7.2.2019.jpg

Source: Bloomberg, JP Morgan as of May 31, 2019. The chart depicts the monthly return distribution of the JP Morgan GBI Index over the last five years. Past performance is no guarantee of future results. Actual results will vary.

The most common investor reaction is likely to be that this part of the EMD opportunity set is now over-valued or unattractive, yet we think one's level of conviction in that judgement should be modest. The dollar fell 2% for the month and remains at a higher level than the start of the year, despite softer US growth data and a more dovish market consensus on the Fed. Year-to-date, currency gains have accounted for only 1.6% of the 8.3% return on the index. A more aggressive fall in the dollar would likely boost FX returns.

At the same time, stronger currencies are opening space for central banks to lower rates. The market anticipates rate cuts in Indonesia, Russia, Mexico, Brazil, and South Africa at some point this year. While some of this is priced in undoubtedly, the start of a broad rate cutting cycle suggests that rate risks are small across the asset class.

So while June was an exceptionally strong month for EMD investors—both local and dollar—the raw ingredients for robust gains which include a permissive Fed, lower US yields, and slower global growth remain intact.

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.