What to watch if you’re becoming anxious about EM assets

If EM bonds sold in dollars fall further that will be a sign sentiment is souring even more.

  • By Jonathan Wheatley,
  • Financial Times
  • Emerging Markets
  • Investing Strategies
  • Investing in Sectors
  • Investing in Stocks
  • Market Analysis
  • Market Volatility
  • Emerging Markets
  • Investing Strategies
  • Investing in Sectors
  • Investing in Stocks
  • Market Analysis
  • Market Volatility
  • Emerging Markets
  • Investing Strategies
  • Investing in Sectors
  • Investing in Stocks
  • Market Analysis
  • Market Volatility
  • Emerging Markets
  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print

For those anxious to see if the turbulence that has flared on emerging markets will deepen, the relative performance of bonds sold in local currencies and those issued in “hard” currencies, mostly dollars, is worth watching.

Local currency bonds have been standout performers among EM assets, with JPMorgan’s benchmark GBI-EM index gaining 38 per cent in the two years to January. They were jolted in February when the dollar changed direction after weakening for two years and expectations of U.S. interest rates turned more hawkish. Yet they recovered most of their losses and held steady — until last month.

From the third week of April, prices for local currency EM bonds had a steep drop, shedding more than 5 per cent. This coincided with a fresh burst of dollar strength and a growing perception that while U.S. economic growth remains robust it may have peaked in emerging markets and elsewhere.

Hard currency EM bonds offered investors less spectacular returns in the two years to January and recovered less well from the February sell-off. But they had not fared as badly as their local currency equivalents during the recent ructions until last week, when they took a sudden dive.

Those declines have eased in the past couple of days, but further losses for the hard currency bonds would not be auspicious.

In “normal” times, as investors sell local currency bonds, you might expect them to put some of the proceeds into hard currency bonds that offer protection from swings in exchange rates. This happened to some extent this year. But not last week.

If investors continue to pull money from EM bonds across the board it will be a sign that perceived risk in emerging markets has taken a step up.

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print

For more news you can use to help guide your financial life, visit our Insights page.


© The Financial Times Limited 2018. All Rights Reserved.
Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.
close
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
close

Your e-mail has been sent.