Investors in Emerging Markets (EM) enjoyed two favorable trends in the third quarter: falling core interest rates and lower risk premiums. Combined with a broadly weaker US dollar, this resulted in strong returns for EM hard currency as well as EM local currency bonds. Speculation about whether the US Federal Reserve would initiate its easing cycle with a substantial 50 basis points cut or a more modest 25bps reduction to the Fed Funds rate ended when the rate setters opted for the bigger adjustment. The Fed communicated that this move was not due to concerns over the economic outlook, but rather due to moderating inflationary pressures, which gave renewed impetus to investors. Interest rate markets over the quarter anticipated the Fed’s decision by repricing shorter dated yields by over 100 basis points and longer tenors by around 60 basis points.
Figure 1: 3Q 2024 performance:
Source: JP Morgan, Data as of October 8, 2024.
Emerging market returns for the third quarter at the country level were generally dispersed along expected market sensitivities. Higher yielding countries benefitted from the general easing in financing conditions by a 72 basis point move in their risk premium, while Investment Grade rated countries only saw a marginal extension of their risk premium by 5 basis points. However, returns for investment grade rated countries were still close to their higher yielding peers due to their stronger ties with core interest rates. Furthermore, oil sensitivity was an explanatory factor for country returns, with exporters generally underperforming in Q3, as crude oil prices traded softer. Angola, Kazakhstan, Gabon and Colombia fell into this category. Some structural reform successes, namely in the highest yielding countries in Latin America (Argentina, Ecuador and El Salvador) propelled this group to the top of the return table.
Political and geopolitical risks, which dominated news cycles since the turn of the year, have continued to hold sway over markets. Going into the fourth quarter, the outcome of the US presidential elections, particularly if Donald Trump wins a new term in office, may lead to increased trade friction and meaningfully impact the geopolitical theatres in the Middle East and Ukraine. Israel’s campaign to strike at Hezbollah in Southern Lebanon is yet to find its conclusion amid rocket barrages from Iran and impending Israeli retaliation. Whether this turns into a more conventional armed conflict or if the conflict remains at the current ‘tit for tat’ level of ballistic missile exchanges will determine the path for the entire region. However, we note that despite the increase in belligerent activity, Middle Eastern risk premiums have not reacted meaningfully to the escalation.
Chinese policymakers announced substantial stimulus measures to address moribund domestic demand in the country. As a result of a multi-year slump in the Chinese real estate market, high unemployment, particularly among young people, and a general concerns over future prospects have led to reduced economic activity and very weak consumer confidence. While faced with these challenges, many Chinese citizens opted to save rather than spend, allocating ever higher shares of their stagnant disposable incomes to savings. Additionally, economic policies in recent years primarily targeted certain industries, for example advanced manufacturing, electric vehicles, solar panels and the petrochemical sector. This focus, combined with the lack of domestic demand, resulted in significant surpluses that were often sold abroad at discounted prices, inflaming international trade tensions. If the Chinese leadership can now address sluggish domestic demand more meaningfully, some of the excess could be absorbed domestically and thus better balance global demand. Due to the size of the Chinese economy and the sheer number of its consumers, invigorated Chinese patrons may become a catalyst for an upturn in global growth.
Figure 2: China consumer confidence
Source: China Economic Monitoring & Analysis Center, Data as of October 10, 2024.
Emerging market central banks have generally reduced policy rates in recent months and are expected to continue on that path amid widespread dissipation of pricing pressures. Notably, central banks in Eastern Europe and Asia have cut interest rates, while in Latin America most policy makers also followed the cutting trend with one major exception: the Brazilian Central Bank, which went against the trend and increased the Selic rate by 25bps to 10.75%, one day after the Fed lowered the Fund’s Rate by 50bps. In Africa meanwhile, the transmission mechanism from monetary policy to the economy is often dictated by movements in the foreign exchange rate. The pass-through from currency devaluations in Egypt, Nigeria and Angola to consumer prices prompted significant policy rate hikes in 2024 to counter the effect of higher import prices.
Figure 3: CB of Nigeria reacts to higher inflation with policy rate hikes
Source: Central Bank of Nigeria & Nigerian National Bureau of Statistics (NBS), Data as of October 10, 2024.
IMPORTANT DISCLOSURE
Availability of this document and products and services provided by MacKay Shields LLC may be limited by applicable laws and regulations in certain jurisdictions and this document is provided only for persons to whom this document and the products and services of MacKay Shields LLC may otherwise lawfully be issued or made available. None of the products and services provided by MacKay Shields LLC are offered to any person in any jurisdiction where such offering would be contrary to local law or regulation. This document is provided for information purposes only. It does not constitute investment or tax advice and should not be construed as an offer to buy securities. The contents of this document have not been reviewed by any regulatory authority in any jurisdiction.
This material contains the opinions of certain professionals at MacKay Shields but not necessarily those of MacKay Shields LLC. The opinions expressed herein are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and opinions contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Any forward-looking statements speak only as of the date they are made and MacKay Shields assumes no duty and does not undertake to update forward-looking statements. No part of this document may be reproduced in any form, or referred to in any other publication, without express written permission of MacKay Shields LLC. ©2024, MacKay Shields LLC. All Rights Reserved.
Information included herein should not be considered predicative of future transactions or commitments made by MacKay Shields LLC nor as an indication of current or future profitability. There is no assurance investment objectives will be met.
Past performance is not indicative of future results.
RISKS OF INVESTING IN EMERGING MARKETS
Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. The risks of investing in emerging markets include, but are not limited to, the risks of illiquidity, increased price volatility, smaller market capitalizations, less government regulation, less extensive and less frequent accounting, financial and other reporting requirements, risk of loss resulting from problems in share registration and custody, substantial economic and political disruptions and the nationalization of foreign deposits or assets.
NOTE TO UK AND EUROPEAN AUDIENCE
This document is intended only for the use of professional investors as defined in the Alternative Investment Fund Manager’s Directive and/or the UK Financial Conduct Authority’s Conduct of Business Sourcebook. To the extent this document has been issued in the United Kingdom, it has been issued by MacKay Shields UK LLP, 80 Coleman Street, London, UK EC2R 5BJ, which is authorised and regulated by the UK Financial Conduct Authority. To the extent this document has been issued in the EEA, it has been issued by NYL Investment Europe Limited, Hamilton House, 28 Fitzwilliam Place, Dublin 2 Ireland, which is authorised and regulated by the Central Bank of Ireland.
NOTE TO CANADIAN AUDIENCE
The information in these materials is not an offer to sell securities or a solicitation of an offer to buy securities in any jurisdiction of Canada. In Canada, any offer or sale of securities or the provision of any advisory or investment fund manager services will be made only in accordance with applicable Canadian securities laws. More specifically, any offer or sale of securities will be made in accordance with applicable exemptions to dealer and investment fund manager registration requirements, as well as under an exemption from the requirement to file a prospectus, and any advice given on securities will be made in reliance on applicable exemptions to adviser registration requirements.
COMPARISONS TO AN INDEX
Comparisons to a financial index are provided for illustrative purposes only. Comparisons to an index are subject to limitations because portfolio holdings, volatility and other portfolio characteristics may differ materially from the index. Unlike an index, individual portfolios are actively managed and may also include derivatives. There is no guarantee that any of the securities in an index are contained in any managed portfolio. The performance of an index may assume reinvestment of dividends and income, or follow other index-specific methodologies and criteria, but does not reflect the impact of fees, applicable taxes or trading costs which, unlike an index, may reduce the returns of a managed portfolio. Investors cannot invest in an index. Because of these differences, the performance of an index should not be relied upon as an accurate measure of comparison.
SOURCE INFORMATION
All ICE Data Indices referenced herein (Each such Index, The “INDEX”), are products of ICE Data Indices, LLC (“ICE DATA”), and are used with permission. ICE® is a registered trademark of ICE Data or its affiliates, and BofA® is a registered trademark of Bank of America Corporation licensed by Bank of America Corporation and its affiliates ("BofA") and may not be used without BofA's prior written approval. ICE DATA, its affiliates and their respective third part suppliers disclaim any and all warranties and representations, express and/or implied, including any warranties of merchantability or fitness for a particular purpose or use, including the Indices, Index data and any data included in, related to, or derived therefrom. Neither ICE Data, its affiliates nor their respective third party suppliers shall be subjected to any damages or liability with respect to the adequacy, accuracy, timeliness or completeness of the Indices or the Index data or any component thereof, and the Indices and Index data and all components thereof are provided on an “AS IS” basis and your use is at your own risk. Inclusion of a security within an Index is not a recommendation by ICE Data to buy, sell, or hold such security, nor is it considered to be investment advice. ICE Data, its affiliates and their respective third party suppliers do not sponsor, endorse, or recommend MacKay Shields LLC, or any of its products or services.
INDEX DESCRIPTIONS
JPMORGAN CEMBI BROAD DIVERSIFIED HIGH YIELD INDEX – JPMorgan CEMBI Broad Diversified High Yield is a sub components of the JPMorgan CEMBI Div Broad Composite Blended Yield Index, which cover the sub investment grade part of this composite index.
JPMORGAN EMBI GLOBAL DIVERSIFIED INDEX ─ JPMorgan EMBI Global Diversified Index is an unmanaged, market-capitalization weighted, total-return index tracking the traded market for US-dollar-denominated Brady bonds, Eurobonds, traded loans, and local market debt instruments issued by sovereign and quasi-sovereign entities.
JPMORGAN EMBI GLOBAL DIVERSIFIED INVESTMENT GRADE INDEX ─ JPMorgan EMBI Global Diversified (EMBI Global Diversified) Investment Grade Index tracks total returns for U.S. Dollar-denominated debt instruments issued by emerging markets sovereign and quasi-sovereign entities: Brady bonds, loans, and Eurobonds that are rated BBB and higher. The index limits the weights of those index countries with larger debt stocks by only including specified portions of these countries’ eligible current face amounts outstanding. The countries covered in the EMBI Global Diversified are identical to those covered by the EMBI Global
JPMORGAN GOVERNMENT BOND–EMERGING MARKET INDEX – JPMorgan GBI-EM Global Diversified (GBI-EM) series, launched in June 2005, is the first comprehensive global emerging markets index of EM local government bond debt. There are three root versions of the GBI-EM with a Diversified overlay for each version; GBI-EM Broad / GBI-EM Broad Diversified, the GBI-EM Global / GBI-EM Global and the GBI-EM / GBI-EM Diversified.
USE OF ISSUER NAMES
Issuer names used herein are provided as examples for educational and illustrative purposes only and are not intended, nor should they be construed as, recommendations to buy or sell any individual security.
MacKay Shields LLC is a wholly owned subsidiary of New York Life Investment Management Holdings LLC, which is wholly owned by New York Life Insurance Company. "New York Life Investments" is both a service mark, and the common trade name of certain investment advisers affiliated with New York Life Insurance Company. Investments are not guaranteed by New York Life Insurance Company or New York Life Investments.
Subscribe to get MacKay Shields insights delivered to your inbox.
Related Thought Leadership