Emerging market bonds were supposed to be dragged lower this year as central banks moved toward withdrawing stimulus. By contrast, the best-performing global debt was all from developing countries.
Sovereign bonds issued by South Africa, China, Indonesia, India and Croatia topped the ranking of 46 markets worldwide in 2021, according to data compiled by Bloomberg as of last week. Only they managed to ignore the biggest annual jump in U.S. Treasury yields since 2013, a shock that was powerful enough to radically change currency carry trades and emerging market equities. .
The positive returns generated by the five markets should give investors at least some confidence that the Federal Reserve will be able to reduce asset purchases and begin raising interest rates without triggering a spike in global volatility. A closer look at the 2021 performance shows that the top performers have mostly fallen in price, but the coupon returns were high enough to offset these losses.
Emerging market bonds as a whole have fallen 1.3% in 2021, a separate Bloomberg index shows. That’s still much better than they did during the so-called 2013 taper tantrum, when the Fed’s signal that it would cut back on asset purchases saw them fall 3.8% over the year, including a drop. 11% from a May high to a low. Three months later.
Coupons and interest rate differentials “will play an important role” in investment decisions in a restrictive environment in 2022, said Shafali Sachdev, head of fixed income, currencies and commodities for Asia at BNP Paribas Wealth Management in Singapore. “Investing in selected emerging market bonds can be a preferred way to do this, rather than lengthening duration or lowering the credit curve.”
South Africa’s bonds have set the world pace this year with a total yield of 8.7%, despite the nation being the first to identify the omicron variant of the coronavirus in November. A 9.02% coupon gain has offset a 0.79% loss caused by declines in bond prices, Bloomberg data showed.
Chinese stocks were up 5.6% in 2021, Indonesia’s were up 5.2%, India’s were up 2.7%, and those of Croatia were up 1%.
The biggest losses were recorded in Hungary, Peru and Chile: three countries in which central banks raised interest rates during the year.
Bonds in South Africa, Indonesia and China appear poised to extend gains through 2022, according to HSBC Holdings.
A “slightly bullish stance” is warranted in South Africa, as its debt market has one of the steepest curves and highest real returns within emerging markets, and offers considerable carry even with currency hedging, analysts led by Andre de Silva in Hong Kong, wrote in a research note this month.
Finisterre Capital is also optimistic about the debt of South Africa and Indonesia.
There have been many improvements in fiscally challenged countries in emerging markets this year, including South Africa, said Damien Buchet, chief investment officer at the London-based investment manager that focuses on emerging market debt. “We still love” its bond market for that reason, he said.
Here are some of the top events and data in emerging markets this week:
- China will release manufacturing and non-manufacturing PMI data on Friday that will provide a more detailed idea of whether the economic recovery is hampered by a housing recession.
- South Korea reports consumer price index data on the same day and trade figures on Saturday. The Bank of Korea has been ahead of its Asian peers in raising interest rates as it seeks to combat accelerating inflation.
- Russia will announce preliminary December CPI figures on Thursday after the index rose to 8.4% in November, the highest level since 2016.
- South Africa will release its budget balance on Thursday, Turkey will report its trade balance on Friday, while Uruguay’s central bank will announce a political decision on Thursday or Friday.
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