The growing appeal of emerging market debt

Investors have witnessed a rebound in fixed-income returns, especially in emerging market debt (EMD). HSBC Asset Management suggests that the emerging market’s (EM) performance is driven by strong macro fundamentals. Additionally, the asset manager contends that a near-term peak in Federal Reserve rates and the global interest rate cycle would be advantageous to many issuers. 

“EM stands poised to outperform developed economies over the next year given more advantageous currencies, a lasting recovery in terms of trade, and a dramatic decline in net debt issuance,” opines HSBC AM.

The asset manager also explains that the positive sentiment around EMs will favour the performance of emerging market debt. Subsequently, it goes on to explain that several EM countries are witnessing improved growth cycles alongside structural reforms.

Besides, after several years of a rating downgrade trend in EMs, the upgrade/downgrade standard has turned more positive due to structural reforms, informs HSBC AM. “Over the medium-term, we expect to see some exciting new investment grade upgrade stories for Serbia and the Dominican Republic,” says the asset manager. It also believes that countries that were downgraded in the past, such as Costa Rica, Ivory Coast, Azerbaijan, Morocco, Oman, and Chile, can be upgraded in the near term.

Shedding some light on the sustainability aspect of emerging market debt, HSBC AM believes that the region has strong opportunities in this area. “Over the longer term, we see the market capitalisation of EM debt gradually evolving towards labelled bonds across all regions and types,” says the asset manager.

For currency bonds, HSBC AM predicts attractive potential total returns in both hard and local currency bonds for the second half of 2023. “Over the next two years, EM bonds and currencies stand poised to outperform, driven by the confluence of a once-in-a-generation carry opportunity, a diversified set of currency investments that can capture the benefit of a cyclically weaker US dollar, and the potential for large capital gain as interest rates decline…,” asserts the asset manager.

View the complete insight here.