Senior Portfolio Manager Anthony Kettle’s weekly BlueBay Emerging Market Debt commentary offers readers a concise yet wide-ranging macro overview. Kettle covers markets large and small, providing insight on how financial, political, and economic developments in one region affect markets elsewhere. Here is his latest insight.
Summary
The ongoing war in Iran continued to dominate the macro landscape this week with the S&P 500 losing -2.1% and the Euro Stoxx 50 gaining +0.1%, while Emerging Markets (EM) equities lost -1.8%. The US rates curve bear steepened with 5-year yields 6 basis points (bps) higher and 30-year yields 3bps higher. 10-year US real rates were 11bps higher to end the week at 2.11%.
In EM credit markets, spreads were 6bps wider for both corporates and sovereigns, while total returns were both down -0.4%. In the corporate space, the transport and real estate sectors outperformed, while the metals & mining and utilities sectors underperformed. In the sovereign space, the notable performers were Bahrain and Argentina. The biggest underperformers were Mozambique, Ukraine, and Senegal.
In the EM local markets, returns were down -0.4% with foreign exchange (FX) contributing -0.3% and rates -0.1%. In the FX space, outperformers were the Brazilian real, Colombian peso, and Hungarian forint, while underperformers were the Malaysian ringgit, Dominican peso, and Indian rupee. In the rates space, Colombia, Mexico, and Uruguay outperformed and Turkey, Thailand, and India underperformed.
Market highlights
Angola has proven to be one of the few bright spots in markets recently given its leverage to higher oil prices. It took advantage of this last week as it came to the market with a new issuance of 7-year and 12-year bonds alongside a concurrent tender of its 2028 bonds, proactively managing its maturity profile.
Market outlook
The Iran-led supply disruption shows no signs of easing and represents the primary concern for the US administration. Beyond oil, the shock extends to critical commodities like fertilisers in what is sure to create inflationary effects throughout industrial supply chains. Markets are only partially reflecting this reality: inflation expectations are rising, particularly in Europe, but US rates markets have been much more contained. Meanwhile, traditional market correlations have broken down in the short term, with rates, equities, and gold all declining together, creating a challenging backdrop for investors as financial conditions tighten. The critical variable for markets will be how long this disruption persists, and on that front, the US administration continues to pursue a dual track of diplomacy alongside a continued military build-up.
From an emerging markets lens, energy price moves are creating regional winners and losers. Asia faces the steepest headwinds given its energy import dependence, while Central and Eastern Europe confront stagflationary risks despite limited direct Gulf exposure. Latin America, conversely, looks to be more resilient given some benefit from improved commodity terms of trade. We continue to hold a cautious approach to EM for now as we wait to gauge the extent of this energy shock as well as the impact on the growth outlook, both still key unknowns for the market given the end date for this war remains a moving target.
Monthly Emerging Market Insights: fixed income and equity insights from our EM investment specialists