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  • Emerging Markets Debt Daily

    Go EM!

    Natalia Gurushina, Chief Economist, Emerging Markets Fixed Income Strategy
    January 06, 2021

    Yesterday’s pandemonium on Capitol Hill only strengthened our conviction about EM as an asset class. Mexico’s headline inflation eased in December, leading to suggestions about a rate cut at the next central bank’s meeting.

    Yesterday’s assault on Capitol Hill in Washington DC only strengthened our conviction about Emerging Markets (EM) as an asset class. Emerging markets’ share of global GDP is nearing 60%, they have higher growth rates, lower debt burdens, and improving macroeconomic policies. Many EMs are now “graduates” – or de facto developed markets. And don’t forget that we are actually getting paid for taking risks in EM. Do I hear you asking about political noise? I think we got a pretty good answer to this question yesterday.

    One underappreciated development in EM is that many countries used the pandemic to lengthen the maturity profile of their external debt (see chart below) and lock in low interest rates. Mexico’s issuance of a 50-year bond with a 3.75% coupon earlier this week is one such example. Even in high yield EM, average duration of external debt is now the highest since 2013.

    Now, back to more tactical matters… Mexico’s headline inflation eased quite a bit in December (to 3.15% year-on-year), leading to suggestions that this opens the door for a cut at the next rate-setting meeting. Some members of the central bank’s board are sympathetic to this idea – their arguments include slow recovery and inflation moving closer to the target. Others, however, are worried about the impact of a sizable minimum wage hike on inflation convergence – especially against the backdrop of sticky core prices (core inflation re-accelerated to 3.8% year-on-year in December). The market currently prices in 40bps of rate cuts in the next six months.

    Chart at a Glance: EM Lengthen Debt Maturity Profile

    Chart at a Glance: EM Lengthen Debt Maturity Profile

    Source: Bloomberg LP


    PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments.; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.

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