Due to unprecedented financial tightening by central banks to tame inflation, potential weaknesses in the financial markets have been exposed. In light of this, Manulife Investment Management examines the effects of the present macroeconomic situation on the outlook for emerging market (EM) bonds.  

“Central banks from EM countries have generally seen an even greater magnitude of tightening, having begun the process months ahead of those in developed markets,” writes Roberto Sanchez-Dahl, Senior Portfolio Manager, Emerging Markets Debt at Manulife Investment Management. 

“But with many developed and emerging sovereigns calling the peak of their tightening cycle, an economic growth slowdown will be challenging to navigate for the most indebted EM issuers as any further support for currency valuations will be limited,” he adds. 

Then, Sanchez-Dahl continues by pointing out that certain EM countries are more financially vulnerable to a rise in the US currency than others. He also discusses how most EM countries with debt-to-GDP ratios below 100% are still in decent financial shape and won’t face a refinancing issue.  

Along with that, Elina Theodorakopoulou, Portfolio Manager, Emerging Markets Debt at Manulife Investment Management, explores how foreign currency reserves can provide information into the risks of emerging market bonds across various countries.  

Furthermore, she contends that several credit actions have occurred in emerging market nations as a result of rising borrowing rates and high levels of inflation. However, she claims that this has enabled these nations to prioritise fiscal discipline and flexibility, which will aid them in coping with future economic shocks.   

“In this environment, we believe it becomes imperative to take a selective approach, relying on both top-down macro analysis and bottom-up security selection,” writes the asset manager 

“Being able to identify excess return opportunities while deviating away from assets that are cheap for a reason will be of high importance for EM debt portfolios in the environment ahead,” it concludes.  

View the full insight here.