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Recent years have been a test of emerging markets resilience. COVID generated the largest decline in global GDP in decades. It was followed by the US Federal Reserve (Fed)’s most rapid hiking cycle in many years and quantitative tightening across most developed economies. Persistently slow growth from China also served as another headwind for emerging markets countries over the last several years.
Emerging markets have proven to be resilient in the face of this adversity. This robustness has been most evident in emerging bond markets, with investment-grade sovereign spreads demonstrating stability in recent years, and BB-rated spreads posting a healthy rally. Many currencies represented in the J.P. Morgan GBI-EM (Government Bond Index-Emerging Markets) have delivered positive returns since the Fed started raising interest rates in early 2022, with some delivering double-digit returns at time of writing. A variety of factors contributed to this outcome:
There are parts of emerging markets where a series of shocks and poor domestic policymaking have significantly weakened debt sustainability and, in some cases, forced a debt restructuring. These countries tend to be some of the smaller, more fragile economies that struggled in the face of the twin shocks of the global pandemic and the ensuing inflation shock. However, these countries constitute a relatively modest portion of the emerging markets bond universe, and in some cases will present a new opportunity as they work through debt restructuring negotiations.
Broadly, we expect emerging markets growth to slow moderately in 2024, but we are not expecting a hard growth shock as lower inflation and lower interest rates boost consumer and corporate purchasing power. There is still some work to do on fiscal consolidation, but for most emerging market economies there is much less effort required than in the US to stabilize public debt. Governance will be a key focus given elections across several emerging markets— Indonesia, India, Mexico and South Africa to name but a few — and in the US.
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China fixed income: Dislocations create opportunities in this large and diverse market
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