Emerging markets debt: Insights into China’s easing and US rate cuts

We discuss how China’s recent easing measures and the US Federal Reserve’s rate cuts are shaping the landscape of emerging market debt, offering both challenges and opportunities for investors.

Transcript

Paul Mohr: Hello. My name is Paul Mohr, Senior Director with abrdn, and you're listening to the Emerging Market Debt Quarterly Podcast, the show that looks at what happened in the recent quarter and provides our outlook for the asset class. Today, I'm joined by my colleague Brett Diment, Head of Global Emerging Market Debt. Brett, welcome to the podcast. It's great to have you on.

Brett Diment: Great. Thanks. Thanks, Paul. Very pleased to be here. 

Paul: Okay. Great. Well, let's let's start today's show by looking back at the the third quarter. What are some of the key highlights from emerging market debt in the quarter and how did the abrdn portfolios do. 

Brett: Yeah so it was two three pretty strong returns across the asset class, city-level currency. So having having not perform quite so well in the first half, local currencies up 9%. If you look at the, JP Morgan, GPI index, followed by mBIE, which is the sovereign, hard currency. So the US dollar denominated bond index up just over 6% and corporates, which is typically the guess, the less less volatile part of the asset class at four and a half.

So generally pretty good quarter on the back of, you know, falling global bond yields, and, you know, inflation pressures generally, generally coming down, in terms of our portfolios, modestly ahead for for local currency and corporates, kind of 25 basis points or so modestly behind for the, about currency sovereign, 2022 basis points, for the year, ahead for all three strategies.

Paul: Okay, great. Well, what we saw, from the Chinese government, they implemented some easing measures, during the quarter. What does this mean for both the, the Chinese markets and broader EM as a whole moving forward? 

Brett: Yeah. So we started to see some easing in the third quarter. And that's, you know, it's been more marked of late where you've seen, for the, for the further interest rate cuts in China, seeing some recapitalization of the banking sector, promise of some, fiscal easing and actually some, intervention in equity markets.

So we've seen, strong performance, from, Chinese equities, and also a bit of a rally from, from the currency, you know, we're inclined to think that, ultimately these measures, won't be able to stem, the deflation we're seeing in the Chinese economy. Just given the very, large excess mas built up in the, in the property market in China and also excess capacity and in key industries.

So, your expectation is that, you know, ultimately it won't turn the tide and growth will remain pretty subdued in China. Now, that's not necessarily a bad backdrop for the rest of emerging markets. Couple of reasons for that. China is, Chinese export prices going down. So that's helping to keep a lid on inflation globally. And also because of some of the long term concerns about the Chinese economy and also, you know, continued, tariffs, the European Union just, just voted to put up tariffs on Chinese electric vehicle sales to the EU, for example, see FDI, increasingly not going to China, go elsewhere in emerging markets.

So actually subdued with subdued growth in China actually can be can be positive for other parts of the parts of the emerging market universe.

Paul: Okay. And, so the other big, story, in the, the financial world was I give back here in the US, the Federal Reserve finally made their their long awaited first rate cuts. Can you talk about, what impact those cuts will have? And further cuts would mean, for the emerging market economies. 

Brett: Yeah, I would say, you know, generally, easing of interest rates, is a positive for emerging markets in straight cuts in the United States, as long as it's against the background of relatively okay growth.

If the Federal Reserve is cutting in, in a period of recession, then yeah, that can be bad for all. Risk assets include emerging markets. Certainly. If you look at the abrdn house view, we think there's some moderation in in US growth. But ultimately the economy's is taking on relatively well as we saw, in the employment numbers that the came out last week within.

But yeah the really the Fed's cutting because of those weaker inflation pressures. So not not a pretty pretty pretty good backdrop for emerging markets. You know, and certainly would expect to see inflows, into the asset class, pickup as a consequence of the coming quarters. 

Paul: The shifting from, looking in the, the rearview to looking ahead here, the, there's a big election coming up, here in the in the US, we're less than a month out now, and the race, really remains too close to call. And so what are some of the implications for emerging markets that we need to consider? 

Brett: Depending on on how that election goes? Yeah. I mean, I would generally, yeah, generally see that, yeah. The Republican, win would on the margin probably lead to higher bond yields in the, in the US, partly a function of increased tariffs, which perhaps would, would would lessen the decrease in inflation somewhat.

Perhaps, perhaps a stronger dollar. So probably the initial reaction would be something of a, the sell off, in emerging markets, if there's a, if, there's a, if there's a Trump win, yeah, we probably will look to fade that really. We think ultimately it's the kind of the key dynamics in the asset class are going to drive things.

So for example, if we if we did get a period of yeah, kind of a sharp move lower, for example, in Mexican, Mexican markets around a Trump victory, that could be an opportunity to add some risk. There. And, I guess conversely, if there's a Democrat, Harris win, then, yeah, obviously some, you know, good performance from selectively.

Maybe that goes a bit too much in the short term. So we could look to reduce some positions. So yeah, I think, you know, we'll see what happens. But we, you know, we we would, if you like, looked at potentially fade market moves both ways around the election in the US. 

Paul: And then lastly, as we look ahead, towards the end of the year, what are some of the key opportunities in emerging market debt that you think investors should know about?

Yeah. I mean, look, I'd say more generally, you know, we would see positioning in emerging market fixed income as relatively light, to that's that's positive. And also, you know, one area that's, that's further compounded is an emerging market culprit. So if you look at, companies in emerging markets, then actually this, net debt is getting paid back.

So if you look at, so far this year, the level of bond maturities in emerging market corporates in US dollars and keep on payments has actually been larger than debt issuance. So if you like negative net financing, so we see that as quite positive technicals in corporates, which we would see as the remain if you like, the low of low volatility, high end of the markets.

Elsewhere you know still some good opportunity in frontier bonds, which is a real real specialty. Expertise. Here for us, abrdn, some of the frontier local markets. You know, we've seen some strong returns, the past 12, 18 months from some of the credit markets and frontiers. We've been top slicing there. We've been into some local market at local market risk and frontiers.

And yeah, Egypt, Pakistan, a couple of the but the local market positions we've been taking on, we've got. Yeah. Pretty high, both nominal and real rates. And then, you know, finally within the, you know, kind of the mainstream emerging market local markets, we Brazil is one we see is pretty attractive. And there's a lot of risk premium in the long end of the curve.

You've got yields north of 12%. Inflation we think will be for four and a half. So quite attractive really. So kind of opportunities across the space you know as ever we we continue to run really quite diversified. Strategies in this space are not taking, too much risk in any one see, any one country.

Paul: Great. So certainly something, we should all consider is some food for thought there. So thank you, Brett. And with that, we will bring this episode of the podcast to a close. Brett, thank you for joining us today. 

Brett: Right. Thank you. Paul.

Paul: And thank you to everyone who took the time to listen in. If you enjoyed today's conversation and please download our podcast from our website or wherever you normally get your podcasts from.

Brett: Thank you very much.

AA-081024-184113-1