Fixed Income

EMD Relative weekly notes: Week Ending November 1, 2019

11/05/2019

James Barrineau

James Barrineau

Head of Emerging Markets Debt Relative

Value dispersion in EMD

With any asset class that has produced double digit returns in a 10-month period, investors have to look harder for value. EMD is no different, and the value proposition has shifted.

Figure 1 shows the story, comparing spreads in the sovereign index—most commonly used as the investable universe in the asset class—with the corporate index. There is always a very tight correlation between the indices, historically approaching 92% (source: JPMorgan). The corporate index has a higher credit quality overall given its higher percentage of single-A rated bonds. However, across the individual ratings categories corporates have higher yields, befitting of an asset that has less liquidity.

Figure 1

emd-blog-11.1.19.png

Sources: Bloomberg, data from August 1, 2019 to November 1, 2019. Chart depicts spreads to US treasuries of the JPMorgan EMBI Global Diversified Index and the JPMorgan CEMBI Broad Diversified Index. Performance shown reflects past performance, which is no guarantee of future results. The value of investments can go down as well as up and is not guaranteed.

On a spread basis sovereign EMD has rallied significantly more than corporate EM beginning in September. Most recently there  has been bigger divergence. If history is any guide, investors should be allocating more of their EMD exposure to corporate dollar debt at this point in the cycle. This is especially so since as spreads for the asset class in general become closer to the low end of their historical ranges, our experience has been that higher current yields available in the corporate space may be more impactful on total return prospects.

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.