Bloomberg Market Specialists Edith Xu and Kathiresan Lakshmanan contributed to this article. The original version appeared first on the Bloomberg Terminal.
Background
After a brutal first-half 2022 performance for emerging markets, there’s a potential resurgence, particularly for bonds, should they take the path of recovery seen in the wake of 2013’s taper tantrum.
EM Interest has heightened recently as stocks, bonds and currencies start outperforming their peers in the U.S. “Corporates, municipals, high yield and emerging markets present more opportunity than any time in the recent past,” according to the fixed-income team at Vanguard Group Inc. led by Sara Devereux.
Slow global growth, Russia’s invasion of Ukraine, and social unrest have all negatively affected EM bonds, with yields surpassing 9% on U.S. dollar-denominated credit. The Vanguard team adds that expected returns for the year ahead are quite strong given the historical trends for these yield levels.
“EM corporate debt, which has shown outperformance so far this year, is more resilient due to its shorter duration profile and diversified spread opportunities,” said Leonard Kwan, a portfolio manager at T. Rowe Price in Hong Kong.
The issue
For the first half of 2022, rate hikes were a significant focus as central banks reacted to rising inflation and the Federal Reserve’s policy of monetary tightening. Now, investors are beginning to bet on interest-rate cuts in developing economies as they attempt to stave off recession.
The Bloomberg Emerging Markets Index of US dollar sovereign and corporate bonds has lost as much as 15% this year, exceeding 2013’s worst drawdown of 9.2%. A scenario analysis of 2013’s post-tantrum recovery suggests these EM bonds may advance more than 8%. Forecasts indicate longer maturities will fare better, led by REITs, natural gas and sovereign bonds.
Tracking
Use Bloomberg’s PORT tool to build a scenario and stress test how it would affect portfolios. Scenarios allow you to stress-test your portfolio to determine which scenarios are best or worst, then drill down into your holdings to see depictions of how holdings perform within a given scenario.
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