The past year was difficult from a macroeconomic perspective but things seem to be better in 2023. While there is considerable uncertainty, Manulife Investment Management believes a less aggressive monetary policy and reduced interest-rate volatility will support risk assets such as emerging market debt.

The investment management firm says that China’s abrupt end of zero-Covid and the accelerated opening will support emerging markets. Additionally, a mild winter in Europe has abated the concerns of high energy prices while the US dollar is retreating from its recent highs and US bonds are seeing lower yields, which offer a powerful tailwind for emerging market debt.

“With elevated yields and attractive relative valuations, we believe EM debt (EMD) is worth considering for global investors searching for income and competitive total returns,” writes Paolo H. Valle, Senior Portfolio Manager, Emerging Markets Debt, Manulife Investment Management.

The asset manager says that starting yield is a key component of total return, and takes the example of the J.P. Morgan EMBI Global Diversified Index to explain the positive rolling returns on EM debt.

“The dramatic drawdowns during 2022 also highlight the impact of real-world factors: geopolitical crises (such as the Russian invasion of Ukraine), central bank intervention (U.S. Fed interest-rate normalization followed by more of the same from most central banks across the globe), industry challenges (such as within the China property sector), and a major shift to risk-off sentiment from investors (roughly US$90 billion in asset class outflows from EMD in 2022),” says Roberto Sanchez-Dahl, Senior Portfolio Manager, Emerging Markets Debt, Manulife Investment Management.

Manulife argues that higher yields in emerging market debt have historically led to higher returns. It analyses the graph of the J.P. Morgan index when the starting yield was at least 5.5% to show the likelihood of a positive 1-year return.

As of January 20, the yield for the J.P. Morgan EMBI Global Diversified Index is at 8.07%, which Manulife believes offers an attractive entry point for investors with enough risk tolerance to ride out the near-term volatility.

View the complete insight here.