EMERGING MARKET BOND
Three-year sector performance
SECTOR ANALYSIS
The worst performing segment across all
bond categories has been emerging market
fixed interest, which fell 10% in US dollar
terms during the three-year period. Top
performers were typically funds with a
primary focus on emerging market hard
currency bonds, regardless of whether they
were sovereign or corporate. As the US
dollar strengthened during the reporting
period, funds with a local currency focus
languished at the bottom. Particularly hard
hit were funds with exposure to energy and
commodity-exporting economies.
MARKET REVIEW
Source: FE Analytics (31 Mar ’13 to 31 Mar ’16)
Three-year annualised return/volatility
Emerging market debt has come under
pressures throughout the period. In 2013,
concerns over the withdrawal of QE by the
US Fed weighed heavily on emerging market
currencies. Five economies were especially
vulnerable to US dollar strengthening and
they became known as the fragile five:
Brazil, India, Turkey, South Africa and
Indonesia. Falling oil prices coupled with the
Russia/Ukraine conflict triggered further
capital outflows from Russia, helping drive
the ruble lower. Russia was subsequently
downgraded by S&P in January 2015 to junk
status. The rating agency also downgraded
Brazil’s credit rating as the Petrobas
corruption scandal and fiscal problems
fueled concerns. China then devalued its
currency in August, raising global investor
concern over emerging markets.
MARKET OUTLOOK
Since February 2016, market volatility has
temporarily calmed and emerging market
bond yield spreads have begun to contract.
With further US rate hikes expected to be
gradual, the US dollar has been weakening
over the short term, helping to ease pressure
on emerging market economies. As various
uncertainties still hang over the major EM
economies, the asset class can expect to stay
volatile over 2016.
Provided by FE Advisory Asia as of 31 May ’16
Source: FE Analytics (31 Mar ’13 to 31 Mar ’16)