When energy costs and fiscal jitters push up rate expectations in the US, Europe and Japan, their government bonds take a hit. That has been the story lately. But a lot of emerging markets have dodged the worst of the selloff thanks to tamer inflation, already tight policy in many places, and healthier public finances in some countries.
Investors are finding both yield and relative stability because many developing countries offer high real returns and sturdier fiscal positions. As Pierre-Yves Bareau, who oversees emerging-market debt as chief investment officer at JPMorgan Asset Management, said, the recent global bond rout "makes EMs more attractive as they act as an income diversifier."
JPMorgan says average inflation in developing economies sits near 3.8%, roughly one-third of the 2022 surge. The bank also reckons officials now enjoy roughly an extra percentage point of room to deal with inflation compared with four years ago.
You can see that flexibility in the latest moves. In August, Brazil, Turkey and Hungary lowered interest rates, while South Korea and the Philippines went the other way and tightened. The Czech central bank kept policy steady after increasing rates in June.
In the background, a Bloomberg chart on "EM Real Interest Rates" uses a simple yardstick for real rates: the policy rate less the most recent headline CPI figure. It also flags that geopolitics, energy costs and domestic growth are driving big differences across countries.
The tone from managers is notably constructive. "It speaks to the asset class's resilience," said Elina Theodorakopoulou, who manages emerging-market debt portfolios at Manulife Investment Management. She sees the recent selloff as "a relative opportunity for global emerging market debt."
Chris Kushlis, who leads emerging-markets macro strategy at T. Rowe Price, expects local rates to stay relatively well anchored given contained inflation and growth near or slightly below potential in several EM economies. His team likes local-currency bonds in Brazil, Hungary, Mexico and South Africa.
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At JPMorgan, Bareau added, "The market is always too aggressive," and his funds lean toward local-currency bonds and lower-rated sovereigns. BlackRock's Michel Aubenas is focusing on markets where policymakers may surprise by not changing rates. BlackRock, like Societe Generale, prefers Czech assets on the view that officials there won't need to hike.
Futures imply one 25 basis-point increase before year end and 100 basis points in total by mid-2027, even so, SocGen projects the Czech policy rate will remain at 3.75% for an extended period. SocGen strategist Juan Orts also thinks wagers on three quarter-point increases by Poland's central bank are too bold.
There is even a bite-sized explainer to go with the theme: "What's Happening in EM: BlackRock, JPMorgan Tout EM Debt," a 4:53 video segment.
Year to date, local-currency EM bonds have gained more than 3%, while US Treasuries and European peers are down 0.6%, according to Bloomberg data. History also helps the bull case: EM debt has frequently performed well in Fed tightening cycles when the hikes stem from robust growth instead of inflation and fiscal strains.
Growth in emerging economies is expected to hold around 3.7% this year, which is bolstering budgets and feeding a more positive ratings trend in places like Argentina, Ghana and Nigeria. Meanwhile, heavier-spending developed nations are wrestling with rising fiscal strains that are pushing yields higher. Thomas Christiansen of Union Bancaire Privée, the firm's chief investment officer who also leads its EM debt business, said, "The fiscal profligacy of developed markets in general makes EM more interesting," and he added that recent moves in rich-world bond markets partly reflect that backdrop.
If you are scanning for steadier income and a buffer from big-market whiplash, this is why more managers are giving emerging-market government bonds a harder look right now.
