Emerging markets debt: Rebounding the asset class

In the latest episode, we recap the final quarter of 2024 before shifting focus to high-yield opportunities in sovereign and corporate bonds while urging caution about non-dollar currencies due to global economic uncertainties.

Transcript

Paul Mohr

Hello. My name is Paul Mohr, senior director with abrdn and you're listening to the emerging Market Fixed Income 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. Great to have you on.

Brett Diment 

Great. Thanks, Paul. Great to great to be on with you. 

Paul Mohr

Well, let's start the show as we as we always do, by looking back at the most recent quarter, the fourth quarter of 2024. Brett, can you take us through how the different sectors within emerging market fixed income performed? 

Brett Diment 

Yeah. So it's it's quite an interesting, interesting quarter. Yeah. Some important developments in the US, with with the with the Trump election, I mean, the real theme was, one where risk assets did well, so spreads tightened US Treasury yields, rose a lot as a market, reduced expectations for, for for fed cuts. And the dollar was strong. So what that meant for the asset class was that, generally high yield did okay, naturally.

So despite, Treasury backdrop where ten year yields rose 80 basis points, you saw positive returns in high yield in both sovereigns and in, and in corporates. Positives. In contrast, you saw some quite negative returns in investment grade, and which obviously is more, more related to US Treasury yields. So within the MB which is the sovereign market, actually investment grade was down about 4.5%, tends to be some quite long duration, sensitive bonds in there in the CMB, which is short duration, investment grade was down 1.6.

So the net of those developments are that, overall the size of the, decline in investment grade was greater than the rally and high yield. So you actually saw negative returns in both and MB, which is sovereign hard currency index overall, down about 2% on the CMB, which is a short duration corporate index, down about 0.8%.

Where you saw, more weakness was in the local currency. So the dollar was was quite strong, helped by that increase in US interest rates. So, overall local currency markets are pretty weak. Down around 7% or so. Yeah. The particular focus activity, couple of countries, Mexico and Brazil, there. 

Paul Mohr

And then Brett, you mentioned the, the election there. So we talked about that last quarter, and the, the podcast and the potential impacts of, of a Trump victory and what that might mean for emerging markets, how things played out, how they played out as expected. Or were there any surprises? 

Brett Diment 

Yeah, I think the, probably just the, the rate we saw of, U.S. Treasury yields increasing was probably something of a, something of a surprise. For market participants. So, you know, I kind of chalk that down as a negative overall for overall fixed income. And, and they included in that, I guess, you know, the other side of that, you know, the country surprises just how well some of the risk markets did in emerging markets. So you saw really, strong returns, from some of the lower rated securities.

So if you look at the the C rated bucket in the sovereigns, for example, we saw term returns of almost 14% in that area. So you've got some quite, you know, idiosyncratic stories really coming through despite the, the higher Treasury backdrop.

Paul Mohr

And given that backdrop, how did the, how did the abrdn operating portfolios do? How did they hold up?

Brett Diment 

Yeah. So, we we had strong benchmark relative performance, in the quarter, both for, 50, 50 funds. And those are funds, which the benchmark 50% against the Abbey global Diversified, which is the sovereign, us dollar index and 50% against the GBR of diversified, which is a level currency index. Which continues a stronger performance for the year.

And also we saw some, strong relative returns, for our, for our corporate strategies, which again, benchmarked against CMB, which is the US dollar emerging market corporate bond index. 

Paul Mohr

Yeah. That's great. Well, we look backwards now. Let's look ahead to the rest of the year, for 2025, what are some reasons investors should be excited about emerging market fixed income in the new year?

 Brett Diment 

Yeah. Look, I think, you know, there's clearly a lot of uncertainty out there. You know, clearly, you know, it's, we it's very uncertain in terms of just how large, you know, tariffs are going to be increased by the incoming administration in the, in the US. Yeah. So given that tariffs will be increased on, on China, you know, generally we're pretty underweight, Chinese risk across our strategies.

 Yeah. Unclear how things, will play out with some of the, the US's other trading partners, I guess. Yeah. Mexico. Of note, the European Union, which obviously impacts, you know, some of the Central European emerging markets. I mean, generally, in those countries, our risk levels are pretty low. Across the portfolios, we think, you know, risk premiums will remain pretty high in Mexico.

So we're pretty pretty flat. The benchmark we're underweight, generally central Europe, which will get hit if we have, continued economic slowdown in, in the European Union. In contrast, you know, where we do see some opportunities, yeah, both in sovereigns and in corporates. So you'll see some mixing opportunities in the high yield, high yield markets.

Yeah. A number of countries, and now current on their current on that, that obviously, you know, with with Zambia, Ghana, Sri Lanka completing those debt restructurings, we think default risk in the sovereigns is pretty low the next couple of years. There aren't there are too many debt maturity payments coming through in 2025.

So expect some continued outperformance of sovereign high yield, although probably to. Yeah certainly not not so levels. We saw we saw in 2024 and corporates really still remains a real sweet spot. You know corporates against the benchmark. We continue to generate strong performance last year. But 100 basis points ahead of. So for corporates continue to have the high yield double be bias in our, in our corporate mandates.

And, you know, one of the very exciting things about the, the corporate index is it's pretty short duration, just under four and a half years. So, you know, in summary, it's kind of the year to be, you know, selective on your allocations. Probably still some challenges, in, in non dollar, currencies. So we're still kind of cautiously positioned there, but certainly, yeah.

So this could be some opportunities. We think rebounding the asset class. 

Paul Mohr

Oh great. We'll look forward to seeing how you guys are able to navigate the markets in the coming year. That feels like a good place to, to bring this podcast episode to a close. So, Brett, thank you for for joining us. We really appreciate your time today.

Brett Diment 

Great. Thanks, Paul.

Paul Mohr

And thank you for everyone who took the time to listen to us today. If you enjoyed the conversation, please download our other podcast from our website or wherever you normally get your podcasts from. Thank you very much.

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