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FT editor Roula Khalaf picks her favorite stories in this week’s newsletter.
The author is Head of Emerging Markets Fixed Income at UBS Asset Management
For emerging market bond investors, stories are rarely straightforward. Ahead of surveys in India, Mexico and South Africa, some investors appeared to be too complacent about the risks. However, the negative market reaction to these elections belies much more positive developments in emerging economies – especially in countries traditionally considered more vulnerable.
As a result of effective monetary policy, emerging market economies have been particularly quick to control inflation and were able to initiate a rate-cutting cycle last year. This proactive approach is expected to provide a major boost to economic growth in 2024. An example is Brazil’s central bank, which has raised rates in 12 consecutive policy meetings from a low of 2 percent in March 2021 to 13.75 percent to reduce inflation. .
Against the backdrop of tighter financial conditions in developed markets, macroeconomic policies have undergone significant improvements in many emerging market countries. These positive developments have helped reduce the risk premium associated with investing in these countries from disproportionately high levels last year. Structural reforms, fiscal discipline and the adoption of flexible exchange rate regimes have helped mitigate risks and strengthen policy credibility.
Overall, the benchmark JPMorgan Global Diversified Emerging Markets Bond Index rose 11.09 percent last year and is up 2.62 percent this year. But we believe investors should look at the many countries that have seen better economic management.
Consider, for example, Argentina, which for the first time elected a president whose main campaign promise was to cut spending. After his election, President Javier Milei demonstrated his commitment to stabilizing the economy by presenting a fiscal surplus plan and making progress on an unprecedented comprehensive reform bill. Although there was some retracement last month, the hard-currency bond index is still up 62.8 percent since Milea’s election last November.
There are similar improving prospects in Africa. One of the first acts of Nigeria’s new president, Ahmed Tinubu, who took office last year, was to crack down on corruption. The new governor of the central bank, Olayemi Cardoso, has expressed a commitment to transparency, clearing outstanding foreign exchange liabilities to local creditors and restoring confidence in the central bank.
Kenya, seen by many investors as a default candidate last year, has shown commitment to reform and procured a new IMF program. The country was able to issue a new bond this year that was heavily oversubscribed.
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Egypt has demonstrated its commitment to reducing debt by selling assets and recently announced one of the largest investment deals in its history. The authorities successfully negotiated an IMF program that released substantial funds to the country.
Indeed, multilateral agencies and lenders such as the IMF are providing emerging economies with unprecedented liquidity support. The list of countries committed to structural reforms and implementing IMF programs is quite extensive. Pakistan, Ghana and Sri Lanka are among those on the agenda or in various stages of negotiations.
Even in an environment of higher and longer interest rates, emerging market economies should be able to refinance at attractive rates. Inadequate access to capital markets, a key indicator of vulnerability, is unlikely to be an issue in 2024. The usual front-loading of the new bond offering in 2024 was well received, with new issues well oversubscribed and outperformed in the secondary market.
In the case of India, Mexico and South Africa, the election results are likely to lead to changes in their political mix, and it is uncertain whether these changes will be favorable to investors. The medium-term bullish story remains intact for countries, but despite post-election volatility, we believe investors need to look at whether there is an adequate risk premium.
We also need to consider the butterfly effect on emerging market countries with the upcoming US election. While we can’t predict if history will repeat itself, investors will remember that when Donald Trump unexpectedly won the 2016 presidential election, the subsequent sell-off in emerging markets was reversed within weeks, and the dollar’s strength was also reversed. A few months. Volatility is always an opportunity for investors.