EM Fixed Income: Brace for a long, stormy summer

We provide a review of the themes which impacted Emerging Markets Fixed Income over Q2 2022 and an outlook for Q3

Fixed income 05 Jul 2022 3 min read

Emerging market fixed income

Key highlights

Emerging markets fixed income (EMFI) delivered negative total returns in Q2. Emerging market asset performance during the third quarter of 2022 is likely to continue to be influenced by high inflation, fear of recession and ambiguity from developed markets (DM) central banks.
EM central banks are far more advanced in their tightening cycles vs developed markets as they responded earlier. DM central banks looking at financial conditions before making any policy actions (regardless of current inflation) could exacerbate inflation expectations and market volatility.
Geopolitical uncertainty remains elevated as the Russian invasion on Ukraine continues to disrupt markets and US-China relations deteriorate. Food and energy inflation is disrupting the social and political fabric in vulnerable emerging countries
Value has been restored in EMFI. Spreads in EM HY credit are wide enough to compensate for higher potential defaults from vulnerable countries. Local yields are high and EMFX is cheap. However, global factors need to improve for that value to be realized.