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Global Recovery to Boost Emerging Market Debt

March 31, 2021 4 min 14 sec
Richard Lawrence
Brandywine Global Investment Management
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Richard Lawrence, I’m a senior vice-president in the portfolio management team at Brandywine Global Investment Management in Philadelphia.

On emerging market debt, we were positive throughout 2020. And despite the big sell-off in EM rates during the peak of the crisis in March, it was really a good place to be invested. I mean, if I pick on Mexican local currency rates as an example, they started 2020 at about a 7% yield. They exploded higher as all risk assets sold off in March. But they ended up finishing 2020 at about a 5.5% yield. So, you really saw a robust rally in EM rates despite the pandemic. And this was reflective of an environment where we had just highly accommodative monetary and fiscal support. And that wasn’t just the U.S., Europe, Japan, Canada, U.K.’s story. It really was a global story. Emerging markets central banks provided a lot of monetary support — cutting rates, stimulating their economies. And EM assets really responded in kind.

And we come into 2021 still with a constructive view. When you think about the outlook for developed bond markets, it’s not really an interesting place to be invested, from a total return perspective. The index that we manage the portfolios against, which is the FTSE World Government Bond index, is yielding a meager 52 basis points right now because it’s loaded with very low-yielding debt from Europe and the U.S. and Japan.

And we like emerging markets because the yields that we can get in some of these markets are much higher, sixes and sevens and eights. And frankly, we think that value can get unlocked because we think we’re in the beginnings of a significant cyclical upswing for the global economy. We’ve got a wall of monetary and fiscal support. We’ve got the vaccines now rolling out on a global basis, and they have started their rollout in emerging markets as well. And we’re pretty constructive on commodities. And obviously emerging markets are a place where you do have a lot of commodity exporters.

In 2021 we’re still constructive on emerging market debt. We think that this global cyclical upswing will be broad based. And so emerging markets will participate in it. And then the fundamentals in emerging markets look pretty good. So, you analyze emerging markets from an external financing needs point of view. So, think about their current accounts. Well, the large emerging markets that we like, their current accounts are actually now in surplus. That happened partly because in 2020 they were importing much less. But it certainly does create a tailwind for those markets and those currencies.

So, we favour having exposures in a select number of markets. We certainly don’t like all markets. Right now, we favour exposures to rates in Mexico, in South Africa, in Brazil, Colombia, Indonesia and Malaysia. Those are the markets that we favour. Valuations have certainly tightened up in all of those markets in 2020. But with the recent backup in Treasury yields, emerging market bond yields have moved a little bit higher as well. Which we think has just increased the yield support for the portfolio. So, we do remain constructive.